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Could you save money by refinancing your car?

Emma Lunn
Written By:
Emma Lunn

Car finance website Carmoola claims it can save drivers money by refinancing their car. We’ve taken a look at how it works.

Carmoola has launched an ‘auto-financing’ service which it reckons can save motorists hundreds of pounds in just a few minutes.

According to research by the site, 3.7 million (7%) motorists are currently feeling the pinch on existing car finance payments.

One in seven (14%) admitted that while they have actively changed energy, broadband or mobile phone providers in the past, they have never considered switching car loan suppliers to save money.

A further one in six (16%) Brits believe that once you take out an agreement on a vehicle, you’re locked in with that provider. But Carmool says this is “a common misconception”.

Carmoola co-founder Aidan Rushby says: “We’re getting savvier in so many ways, yet this seems to be a real blind spot for many motorists. We’re encouraging all drivers to dig out a better deal.

“How much you’re likely to save will differ from one individual to another, but if your credit score has improved considerably since you took out your original agreement, and you’ve been making your payments on time, then it could be a considerable amount.

“A lower interest rate could dramatically reduce your monthly payments, while opting for a longer contract term could also slim down your monthly outgoings if you’re looking for greater affordability.”

How to save money on your car finance

Millions of motorists finance buying a new vehicle with either a hire purchase (HP) agreement or a car loan.

HP is a type of loan – but you don’t own the car until the end of the contract. This means your vehicle can be repossessed if you don’t make repayments on time.

Car loans are a type of personal loan used specifically to buy a car. You’ll agree a term and monthly payment with the lender. Unlike HP, you own the car from day one.

If you have HP or a car loan you might be able to reduce your payments by refinancing to a different lender. To do this, you’ll need to settle up your current contract and then start another (cheaper) one.

So, the first thing you should do is contact your existing lender and ask for an early settlement quote.

Meanwhile you can get a new quote for finance from another lender such as Carmoola. The app carries out a soft credit check, so getting a quote won’t affect your credit score or any future applications you make.

If the new deal is better than your current one, Carmoola allows you to pay off your existing loan in just a couple of taps. You then make payments on the new loan.

However, Carmoola cannot refinance personal contract purchase (PCP) deals. PCP is a type of loan, but you don’t borrow the full price of the car. Instead, you borrow the difference between the car’s value and the expected value at the end of the agreement. At the end of the term, you have the option to buy the car by making a “balloon payment”.

If you have a PCP plan, a Carmoola loan can be used to pay the balloon payment payable at the end of the deal to take possession of the car. However, it can’t be used to exit the PCP scheme early.