Car refinance Car finance FAQs: 25 common questions answered

The routes to cheaper car finance in 2025

Understanding APR is not just percentages - it is what you actually pay each month.

Rates have stabilised and refinancing has surged in the UK. With average post-refinance rates dropping from roughly 10.45% to 8.45%, many drivers are trimming payments by £71 to £87 a month. Here is how to navigate today’s car finance, cut costs, and avoid pitfalls.

Who benefits most right now

This guide suits UK drivers with existing car loans or PCPs, buyers weighing up new or used finance, and anyone considering electric vehicles. If you want to lower monthly payments, lock in a lower APR, or adjust term length for stability during cost pressures, these insights will help you compare lenders, assess risk, and time your move.

Finance basics you will see on every quote

• APR: The annual cost of borrowing, including fees. A 2-point APR drop can save hundreds over a term.
• PCP: Lower monthly payments with a balloon at the end. You can return, pay the balloon, or refinance.
• HP: Fixed payments to own the car at term end. No balloon.
• Refinance: Replacing your current agreement with a new one at better terms.
• Balloon/GMFV: The optional final payment on PCP to take ownership.
• LTV: Loan-to-value - how much you borrow versus the car’s value.
• Early settlement figure: What it costs to clear your finance now, including any fees.
• Negative equity: You owe more than the car is worth. Refinancing may still work if the new APR is low enough or term is adjusted.

Over 80% of new cars in the UK are financed - knowing the terminology protects your wallet.

Market context: New business volumes dipped by about 5% in parts of 2025 due to household cost pressures, yet the market remains resilient near £39 billion. Average loan sizes rose in Q2 2025 - new cars to roughly £41,983 - as buyers stretch terms to manage monthly affordability.

Your main routes to better terms

Refinancing is surging - nearly 70% year-on-year in Q2 2025 as rates stabilised. Consider these options:

• Refinance with a credit union: Often the sharpest cuts to monthly payments. In Q2 2025, average reductions were about £87 per month and credit unions took over two-thirds of the refinancing market. Membership rules apply but are usually straightforward.
• Refinance with a bank: Savings still meaningful, averaging roughly £46 per month. Banks regained the lead in total automotive financing overall, which can mean broader product choice.
• Stick with captives for new vehicles: Manufacturer-linked lenders dominate new car finance by market share and may offer rate incentives or deposit contributions.
• Extend the term: Reduces monthly cost but can increase total interest. Useful during tight months, but model the full cost.
• Switch product type: PCP to HP or vice versa can reshape monthly costs and ownership outcomes. PCP keeps cash flow light; HP is simpler to own at the end.
• Consider EV-specific offers: The transition to greener vehicles is expected to support single-digit growth in new business. Lenders may sharpen EV deals to capture demand.

Lender landscape at a glance

What it could cost - and what you might save

• Average post-refinance APR in 2025: around 8.45% vs 10.45% before.
• Typical monthly saving: £71 overall, up to £87 with credit unions.
• Loan sizes are higher: New car average nudged to about £41,983 in Q2 2025. Longer terms can keep monthly costs down but add to total interest.

Risks to weigh:

• Extending terms raises the total interest paid.
• Early settlement or arrangement fees can offset savings if not accounted for.
• Negative equity can limit options or increase rates.
• Variable household bills and higher vehicle excise duties can strain affordability.

Rule of thumb: If the APR drop is at least 1.5 to 2 points and fees are low, refinancing can be worthwhile. Always calculate total repayable, not just the monthly change.

Who is likely to qualify

• Credit profile: Clean repayment history, stable income, and manageable unsecured debt help. Missed payments do not rule you out, but expect tighter terms.
• Equity position: Neutral or positive equity improves offers. With negative equity, some lenders still refinance if the new LTV remains sensible.
• Vehicle criteria: Age and mileage caps apply, especially for PCP refinances. EVs often have different residual assumptions.
• Employment and residency: UK address history and verifiable income are standard checks. Self-employed applicants should gather tax returns and bank statements.
• Existing agreement: Check for settlement terms and whether your lender allows early refinance without heavy penalties.

Tip: Credit unions often consider broader affordability, not just headline scores, which can help borderline cases.

The refinance journey in simple steps

1. Get your settlement figure from your current lender
2. Check your credit report across the main UK agencies
3. Collect payslips, bank statements, and proof of address
4. Compare APRs from credit unions, banks, and captives
5. Model total repayable and any fees before deciding
6. Apply and pass affordability and identity checks
7. New lender settles your old agreement directly
8. Set up payments and diarise any cooling-off period

Weighing the upsides and the trade-offs

Pros:

• Lower APR and monthly payments during cost pressures
• Option to shorten term and reduce total interest
• Ability to switch product type to match goals

Cons:

• Fees can erode savings if not modelled
• Extending term may increase total cost
• Limited options with heavy negative equity or older cars

Balanced view: In 2025’s stabilising rate environment, the maths often favours refinancing if you secure a clear APR cut and keep fees in check.

Red flags and practical checks before you sign

• Fees audit: Early settlement, arrangement, documentation, and any broker fees.
• Balloon risk: If refinancing a PCP balloon, avoid stretching beyond the car’s likely lifespan.
• Mileage and condition: Excess mileage or damage can affect GMFV and refinance terms.
• Commission transparency: The FCA’s proposed redress scheme highlights past mis-selling risks. Demand clarity on commissions and rate setting.
• Emergency buffer: Stress test payments against higher bills or job changes.

If you are struggling, contact your lender early - they can offer payment holidays, term extensions, or refinancing to protect your credit file.

If refinancing is not ideal

• Voluntary termination: If you have paid at least 50% on HP or PCP, you may be able to return the car under VT rules. Check your agreement.
• Product switch: Move to HP for ownership certainty or PCP for lower monthly costs.
• Downsize or delay: A smaller or later purchase may improve affordability.
• Salary sacrifice for EVs: Potential tax advantages for eligible employees.

Quick answers to common questions

• Is now a good time to refinance? Yes, if you can cut APR by around 1.5 to 2 points and fees are modest. Credit unions are delivering the largest monthly savings.
• Will refinancing hurt my credit score? A hard search may cause a small, temporary dip. Consistent on-time payments usually help over time.
• Can I refinance a PCP balloon? Yes. Many lenders offer balloon refinancing, but model total cost and the car’s future value.
• Fixed or variable rates? Most UK car finance is fixed. Fixed rates help budgeting when bills are volatile.
• What if I am in negative equity? It is still possible, but the new loan may need a higher APR or a contribution to cover the gap.
• Are banks or credit unions cheaper? In Q2 2025, credit unions delivered larger average monthly savings. Always compare exact APRs and fees.
• Can I claim compensation for mis-sold finance? The FCA has proposed a redress scheme with average payouts around £700. Check eligibility if you suspect historic mis-selling.

What to do after reading this

• Gather your settlement figure, credit file, and proof of income.
• Compare quotes from a credit union, a bank, and a captive to benchmark APRs.
• Use a repayment calculator to model total repayable with fees.
• If payments are tight, speak to your lender now about support options.

Important information

This guide is general information for UK consumers and not personal advice. Finance is subject to status, affordability checks, and lender criteria. Always read your agreement, calculate total repayable, and consider independent advice where appropriate.