Car refinance Car finance: do you really need it?

What the latest UK car finance data means for you

UK car finance is shifting. New business in July 2025 edged up, and rate cuts have boosted confidence. Yet August softened, reminding us timing matters. With over 80% of new cars bought on finance and £39 billion borrowed in 2024, understanding refinancing can meaningfully cut your total cost.

Refinancing is not about chasing the lowest rate. It is about the right deal for your budget, vehicle and timeframe.

Who benefits most right now

If you financed a car during higher-rate months, want to reduce monthly outgoings, or are considering switching into a used car or an EV, this guide is for you. It also suits drivers nearing a PCP balloon, those with limited savings seeking no deposit options, and anyone who needs structured steps to compare offers without harming their credit.

The language of car finance - decoded

A few terms will sharpen your decision making:

• APR: The cost of borrowing including interest and some fees. Use it to compare products.
• PCP: Lower monthly payments with a final balloon if you keep the car. You can hand back, part-exchange, or pay the balloon.
• HP: You pay down the full price across the term. No balloon. Ownership at the end after the option to purchase fee.
• Balloon payment: The large final sum on PCP if you want to keep the car.
• Settlement figure: What you must repay today to close your current agreement. Get it directly from your lender.
• Negative equity: When your car is worth less than the finance left. Common early in PCP or longer terms.
• LTV: Loan-to-value. Higher LTV can mean higher rates.
• No deposit finance: Spreads the full cost but can raise interest and total paid.

Market context matters. New car finance volumes were up 7% in the first seven months of 2025, used car volumes dipped 2%, and EV finance is growing from a low base. These shifts influence what lenders will offer on rate, term and vehicle criteria.

Your practical choices compared

Refinancing is not one-size-fits-all. Consider these routes:

• Refinance to a lower rate: Recent base rate cuts have filtered through unevenly. If your credit profile improved or you financed at a peak, a new agreement could reduce costs.
• Switch PCP to HP: Useful if you want to own the car outright and avoid a balloon. Monthly payments can rise, but total interest may fall.
• Extend the term: Lowers monthly payments. Increases total interest. Monitor for negative equity risk.
• No deposit refinance: Helps cash flow today. Expect a higher APR and stricter affordability checks.
• Bad credit specialist products: Widely available, but scrutinise fees and long-term cost.
• EV-focused deals: Some lenders offer sharper terms on BEVs as adoption grows. Useful when moving from ICE to EV.

Snapshot comparison

Standout point: Focus on total cost over the term, not just this month’s saving.

Costs, impact and the risks to weigh

• Rate direction: July 2025 new finance values rose even as volumes were mixed. August dipped. Volatility means shop around rather than assuming cuts always filter through.
• Fees: Watch for arrangement fees, option to purchase, and early settlement charges. Include them in your APR comparison.
• Negative equity: Used car sales are strong and average vehicle age is a record 9.4 years. Depreciation profiles vary, which can trap you if you lengthen terms too far.
• Cash flow vs total paid: Extending the term reduces monthly strain but usually increases total interest. Balance today’s budget with tomorrow’s cost.
• Credit impact: Multiple hard searches can dent your score. Prefer eligibility checks that use soft searches until you choose a lender.

If you are struggling, lenders and industry bodies urge early contact. Early conversations can unlock forbearance options and protect your credit.

Who is likely to qualify

• Credit profile: Stronger scores mean better rates. Bad credit is not the end, but you may face higher APRs.
• Income and affordability: UK lenders must assess affordability under FCA rules. Provide payslips, bank statements and proof of stability.
• Vehicle age and mileage: With the UK fleet ageing, lenders often cap age and mileage at refinance completion. Very old or high-mileage cars may reduce lender appetite.
• Equity position: Positive equity makes approvals smoother. Negative equity can be rolled in, but costs rise.
• Residency and documentation: UK address history, driving licence, and proof of insurance are standard.

Tip: If you plan to switch into a used car, remember used finance volumes dipped 2% early in 2025, so criteria may be tighter than for new cars.

From quote to keys - the 7-step path

1. Check your settlement figure and current APR.
2. Get soft-search eligibility quotes across products.
3. Value your car to confirm equity or shortfall.
4. Compare like-for-like total cost, not just monthly.
5. Choose term length that fits your mileage and plans.
6. Submit documents and complete affordability checks.
7. Settle old agreement and start your new payments.

Advantages and trade-offs at a glance

• Pros: Potentially lower rate after cuts, clearer budgeting, tidy end-of-term outcomes, chance to switch product type, option to roll fees into the loan.
• Cons: Fees can outweigh gains, longer terms raise total interest, negative equity risk, approval not guaranteed, August-style market dips can tighten pricing temporarily.

Consider timing. July’s growth signalled improving confidence, but monthly data can swing. Patience can secure a better offer.

Red flags before you sign

• If the monthly looks great but the term jumps significantly, check the total interest.
• A no deposit offer can help cash flow yet push up APR.
• Do not ignore mileage limits on PCP or condition charges at handback.
• EV switchers: confirm charger grants, insurance and residuals before locking terms.

If you are worried about payments, contact your lender early. Help is easier to arrange before you miss a payment.

Alternatives worth a look

• Personal loan: Often competitive for strong credit and keeps the car unencumbered.
• Overpay your current agreement: Reduces interest if allowed without penalty.
• Sell or downsize: Clear the finance then buy cheaper to reset your budget.
• Do nothing for now: If you are on a favourable rate, waiting may beat moving.
• Salary sacrifice EV: Potential tax advantages if your employer offers it.

Quick answers to common questions

• Will refinancing always save me money? No. If fees are high or the new term is longer, your total cost can increase despite a lower monthly.
• Can I refinance with bad credit? Yes, but expect higher APRs and tighter checks. Improve eligibility by tidying up existing commitments first.
• What if my car is in negative equity? You may roll it into a new deal, but it raises payments and risk. Consider part-exchanging into a cheaper car.
• Is now a good time to switch? Rates have eased and July activity grew, but August showed volatility. Compare options and watch for seasonal pricing.
• How do EV deals differ? Some lenders price EVs keenly and offer tailored terms. Factor in insurance, home charging and potential residual value shifts.
• Will a soft search affect my score? No. Hard searches can, so use soft searches until you are ready to proceed.

Make your move with confidence

Gather your settlement figure, car valuation and three quotes that use soft searches. Compare total cost, not just monthly. If the numbers stack up, proceed. If not, set a calendar reminder to check again next month. Switcha can help you compare options quickly and clearly.

Important information

This guide provides general information only and is not personal financial advice. Your eligibility and pricing depend on your circumstances. Check terms carefully and consider independent advice if unsure. If you struggle with payments, contact your lender promptly.