Car refinance Car finance vs alternatives: which is right for you?

Car refinance Car finance vs alternatives: which is right for you?

What the UK market means for your next car

The UK car finance market remains resilient despite economic uncertainty. In 2025, the value of new consumer car finance rose around 6%, with new car finance up 8% and used finance up 4%. More than 80% of private new car registrations are supported by point-of-sale finance. Used car activity is strong too - 7.6 million used cars changed hands in 2024 and the average car age reached a record 9.4 years.

Understanding APR is not just about percentages - it is about what you will pay in real pounds each month.

Who will benefit from this guide

If you are deciding between keeping your current car on better terms or switching to a different finance route, this guide is for you. It suits first-time buyers, second-car households, and drivers considering used cars, no-deposit options, or an EV. You will find clear comparisons, plain-English definitions, and a step-by-step plan to reduce costs and avoid regrets.

The finance language decoded

Understanding the basics helps you compare like-for-like.

• APR: The annual percentage rate that summarises interest and most fees. Lower APR usually means lower overall cost.
• PCP - Personal Contract Purchase: Lower monthly payments, with a large optional final payment (balloon) if you want to keep the car.
• HP - Hire Purchase: Fixed monthly payments, typically with a deposit, and no final balloon. You own the car at the end after the option-to-purchase fee.
• Leasing - Personal Contract Hire: You rent the car for a term. Low monthly cost, but you never own the vehicle. Mileage and condition charges apply.
• Refinance: Replacing your current car loan or PCP/HP with a new agreement to lower monthly payments, change the term, or adjust the APR.
• No-deposit finance: £0 upfront, higher monthly payments or APR possible.
• Balloon payment: The large final payment in PCP to take ownership.
• Equity: The value of your car minus what you owe. Positive equity can reduce your next finance amount.
• Negative equity: When the outstanding finance is more than the car value. Refinancing can sometimes spread costs but may increase total interest.

Short market signals to watch:

• Base rate movements can change APRs and your eligibility.
• Industry outlook remains cautious - over half of insiders expect spending to fall, so incentives and product mixes may shift.
• EV finance is growing, with around 15.5% of new finance volumes supporting battery electric vehicles in mid-2025.

Your routes to the driver’s seat

The best option depends on budget, ownership goals, and risk tolerance. Use this side-by-side view to compare the big choices.

Standout line: If owning outright matters, HP or a bank loan are usually clearer paths than PCP or leasing.

What it might cost - and why it changes

Interest rates, deposit size, and vehicle type drive your total cost. Recent base rate cuts have lifted confidence, but pricing still varies by lender and credit profile. No-deposit arrangements help with affordability today, but often raise monthly costs or APR. Used cars remain attractive as values and supply normalise, though finance volumes can fluctuate month to month.

Key impacts:

• Monthly payments: Lower with PCP or leasing, higher with HP and some bank loans.
• Total cost: Often lowest when the term is shorter and APR is lower. Extending terms to cut monthly payments can raise the total you pay.
• Depreciation: New cars lose value fastest. Leasing and PCP can mitigate resale risk, but you might pay for excess mileage and damage.
• EVs: Finance availability is improving, but check range, charging access, and residual values before committing.

A lower monthly payment can still cost more overall if the term is longer or fees are higher.

Can you qualify - typical eligibility checks

Lenders look at affordability and risk, not just your credit score.

• Credit profile: Clean histories access better APRs. Thin or impaired files may still qualify at higher rates.
• Income and expenses: Expect lenders to review payslips or bank statements and factor regular bills.
• Vehicle age and mileage: Refinance and HP may limit car age and mileage at the start and end of term.
• Loan-to-value: High advances on rapidly depreciating models may be restricted.
• Deposit: £0 is increasingly available, particularly online, but improves affordability checks if you can contribute.
• Existing agreement: For refinancing, lenders consider settlement figure, remaining term, and any negative equity.

Tip: Use a soft-search eligibility checker to gauge likely terms without impacting your credit score.

Refinancing or buying - step-by-step

1. Get your settlement figure from your current lender.
2. Value your car using at least two reputable sources.
3. Check your credit file and correct any errors quickly.
4. Compare APR, term, fees, and total payable like-for-like.
5. Run scenarios - shorter term vs lower monthly payment.
6. Read mileage, damage and early settlement clauses carefully.
7. Secure an agreement in principle before visiting a dealer.
8. Budget-test payments against three months of statements.

The trade-offs in plain English

Refinancing can cut monthly costs or secure a lower rate, especially if your credit profile has improved or market pricing has softened. It can also extend your term, increasing total interest. PCP keeps payments low and adds end-of-term flexibility, but the balloon can be a shock if values fall. HP is straightforward when you want ownership and budgeting certainty, with the trade-off of higher monthly payments. Leasing suits those who prioritise low monthly costs and regularly driving new cars, but there is no equity and mileage charges can bite.

Red flags before you sign

• Watch for fees: Arrangement, option-to-purchase, early settlement, and excess mileage can add up.
• Check affordability under stress: Could you still pay if rates rise or income dips?
• Beware negative equity: Small deposits and long terms increase the risk.
• Used cars: Inspect history, MOT record, service stamps, and warranty coverage. Independent checks are worth it.
• EV considerations: Battery health, warranty length, and realistic charging access at home or locally.

If a deal looks easy because the deposit is £0, read the small print twice.

If you want alternatives

• Bank loan: Useful if you can secure a competitive fixed rate and prefer to own from day one. Keep the car title in your name and negotiate as a cash buyer.
• Credit card: Works for smaller sums or deposits when promotional rates apply. Factor fees and revert-to-rate timing.
• Saving and buying later: Delays gratification but reduces borrowing costs and risk.
• Car subscription: All-in monthly package with insurance and servicing included, but often pricier than standard leasing.

FAQs

• Is refinancing my existing car finance worth it? It can be if you secure a lower APR or better term, or if you need to reduce monthly payments. Always compare the total payable and any fees before switching.

• PCP vs HP - which is cheaper? PCP usually offers lower monthly payments. HP can be cheaper overall if you want ownership without a large final balloon, depending on APR and term.

• Can I get no-deposit finance? Yes, £0 deposit is widely available. Expect higher monthly payments or APR, and ensure the total cost remains affordable.

• What if my car is in negative equity? You may roll it into a new agreement or refinance, but it increases borrowing and interest. Consider a shorter term or contributing a deposit to reduce the gap.

• Are EVs harder to finance? EV finance is growing across new and used markets. Check residual values, battery warranties, and mileage needs to ensure payments reflect real-world use.

• Should I lease or finance to own? Lease if you prefer low payments and frequent car changes. Finance to own if you value long-term control and want to avoid mileage charges.

Make your decision with confidence

Start by clarifying your goal: lowest monthly payment, lowest total cost, or fastest path to ownership. Gather your settlement figure, check your credit files, and compare options side by side. Use soft searches to narrow providers, then test affordability against your monthly budget. If you can, add a modest deposit to reduce risk and interest.

Important information

This guide provides general information about UK car finance and refinancing. It is not personal advice. Rates, eligibility, and features vary by lender and your circumstances. Consider seeking independent financial advice before committing.