Car refinancing is not yet a mainstream term in the UK. As surprising as it may seem, many car owners who have their cars on finance aren't aware they could switch that finance deal and potentially save hundred of pounds per year on their existing deal. In some respect you can't even blame them, the process in the UK is not spoken much about due to the financial benefit of car dealers and car finance lenders.
What is Car refinancing?
Car refinancing is when you settle the full balance on your current car finance with a different loan. This might be the same sort of finance you had before such as PCP. The purpose of this is to save money on the total interest payable to the original car finance lender by taking out a cheaper APR car finance.
Customers typically have two ways of getting car finance.:Dealerships & Online Finance Brokers.
Car finance via the Dealerships; the established route:
Customer visits a showroom. They either have a particular car in mind, or go there speculatively.
The Dealer makes the customer aware of the finance options available to them, and offers a combination of a great deal on a car, and a finance package, all in one place; a convenient set up for the buyer, and great for the Dealer, as the customer represents a captive audience.
The drawback here for the Consumer is the limited choice of finance products, but as the key driver for the buyer is obtaining their ’dream car’, APR can easily be overlooked, with the focus on monthly repayments; for some people, simply getting ‘approved’ is key.
In terms of licensing to sell financial products, Dealers historically only required a Consumer Credit Licence to enable them to refer a customer to a Lender for a car financial product.
Unlike in other areas of consumer finance such as mortgages, the Dealers had no training, nor any responsibility to provide the ‘best advice’ for a customer.
This changed in August 2015: Instead of a CCL issued by the Office of Fair trading at the cost of £150, a Dealer now requires full ‘FCA Authorisation’ ; gaining authorisation is costly(can run in the thousands of pounds) and involves ongoing reporting and yearly fees, as well as the obligation to treat customers fairly in line with ‘TCF’ guidelines issued by the FCA.
Many Dealers opted out of offering finance due to associated costs but those who remain still don't offer a whole of market to adequately compare the best finance deals for the customer or inflate the cars price by way of increasing the car finance amount and choose to advertise only the low monthly payment to the car buyer as the upside.
Some say Used Car Dealers had it too easy for too long, and many customers were saddled with poor deals on finance because they didn't know how to shop around, or couldn’t.
Car refinance provides a route for these consumers to switch their existing finance with a cheaper car finance product if they are eligible.
Car finance online- the disruptor
This model disrupted the profit dealers were making from inflating car finance deals and in so many ways the practice just moved on to a different party and the price inflations didn't stop.
Online Brokers have a selection of Lenders, generally from 5-20, giving more flexibility on what kind of vehicle can be bought, and ensuring more products are available to cover varying borrower's circumstances.
The customer gets to shop around for a car,safe in the knowledge that the finance agreement they have can be ‘ported’, should they change their mind about a car or Dealership they've engaged with. Empowerment and convenience are the key selling points for such providers.
The problem here is the car finance brokers were essentially offering credit as lenders. They were free to manipulate the APR on offer from the car finance lender in a bit to boost their commission from these deals.
What we know about car refinancing:
- Consumers without much credit history pay a premium when financing a car
- Consumers with poor credit also pay a premium
- Following the 2007 ‘credit crunch’, millions of people defaulted on loans, affecting their credit scores
- Consumer credit ratings improve after sustained period of ‘on-time’ payments
- Over 3 million customers in a 3 year period, have bought a used car using finance from Dealerships, who aren't obliged to find the cheapest deal.
- Many more may have used subprime personal loans. Obtaining data around this does not appear possible, and the accuracy would be questionable if it were.
Why you should refinance your current car finance?
Customers borrowing money post 2011, are subject to the revised Consumer Credit Association laws,meaning early repayment penalties can not exceed 1% of the loan outstanding. Penalties can not be charged if a loan balance is below £8000.
- The potential savings are huge
- The process is relatively straight forward.
|Hire Purchase(HP)||Personal Contract Purchase (PCP)||Personal loan|
|Refinancing your car Loan with a HP agreement(secured on the car) is exactly the same as getting a new HP agreement. You will still be afforded the same conditions. 1)Fixed monthly payment over the term of the Loan after which ownership of the vehicle can be transferred upon payment of an administration fee. 2) The Loan can be settled early although an early settlement charge may be imposed.||Refinancing your car loan with a PCP agreement(secured on the car) is exactly the same as getting a new PCP agreement.1)This is usually the cheapest monthly payment due to the future value of the car deferred as a one time payment known as the final or balloon payment. 2)The loan can be settled at any time by obtaining a settlement figure from the lender and making full payment.||A personal loan is different from a HP or PCP agreement as it is not secured against the car. Refinancing your car loan with a personal loan is slightly different based on your existing Car Loan. 1)If you have a personal loan there is no difference. 2) If you have a PCP agreement, your overall cost will reduce but your monthly payment or term might increase.Whilst with a HP agreement your overall cost will reduce. In both cases you will take ownership of the vehicle and lose your voluntary termination rights which allows you to return the car to the Lender halfway through the agreement at no cost.(providing you have abided by the terms). A personal loan will allow you to settle your loan early based on Lender terms and conditions.|