What Is Refinancing? Can It Help With Financial Difficulties?

When you sign that contract at the start of your agreement, you never see future issues coming. However, life has its ups and downs, and things can change. As more people slip into financial trouble based on the ongoing cost-of-living crisis, it’s becoming more and more common for people in financial agreements to fall behind. Obviously, no one wants to fall behind, but sometimes it happens, and what you do next is important.

The best plan of action is always to contact your finance provider and discuss your options. They could offer you the opportunity to delay or reduce your payments to help you get back on your feet. One thing they might discuss though is refinancing your agreement, but what is this? How does it work?

As a car finance lender offering refinancing agreements, we know a thing or two about how they work. Take a peek through our guide and see how it can help you save on those monthly payments.

👉 What is refinancing?

👉 How refinancing can help you - a closer look

👉 The refinancing process

👉 The pros and cons of refinancing

👉 Can refinancing help with financial difficulties?

👉 Positive and negative equity and its role in refinancing

👉 Interested in refinancing - your next steps

👉 Refinancing FAQs

What Is Refinancing?

Summary: Refinancing replaces your current car finance agreement with a new one, often to reduce costs, lower interest rates, or choose a different car. It involves applying for a new loan that pays off your existing one.

Refinancing replaces an existing car finance agreement. In refinancing, you swap out your current agreement for something new. This could be a more expensive car on higher terms, or something cheaper that helps you cut down on monthly outgoings whilst still having four wheels in front of you. In the case of financial difficulty, refinancing can be used to switch to a cheaper car with lower rates and help reduce the financial pressure month to month.

How Refinancing Can Help You – A Closer Look

Summary: Refinancing can help you reduce monthly costs, lower your interest rate, or switch to a car that better fits your budget.

We’ve already mentioned how refinancing can help you save, but let’s go into more detail as to how you can benefit from switching your finance.

If you’re currently financing a car with Marsh Finance worth £10,000 on a 36-month loan term, your repayments will be around £359, with an average credit score. If you struggle to make these payments, you could switch to a cheaper car, say a £5,000 option on a 36-month loan, bringing your monthly payments down to £179. That’s a saving of nearly £200 a month, and a much-needed pressure release on your finances. It’s clear: refinancing is your key to loan term changes, whether that be a cheaper car on different terms or a more expensive car on new terms.

Also, refinancing can sometimes lower your interest rate if your credit has improved or market rates have changed. A lower interest rate can reduce the total interest paid over the life of the loan, but a lower interest rate isn’t guaranteed.

Of course, refinancing isn’t as simple as this. The amount of time you have left on your current loan will play a part, and how much you have already paid off will too.

Nevertheless, refinancing can come at a great time if you’re looking to reduce financial pressures.

⚠️ A word of warning: Refinancing is NOT a get-out-of-jail-free card. You should only consider refinancing if you can absolutely afford the new payments. If you’re in financial hardship, refinancing may not be possible, as your financial issues flag to the lender during eligibility checks.

The Refinancing Process

Summary: Refinancing replaces your current car finance agreement with a new one, which involves applying again, passing affordability checks, and having the new lender settle your existing loan.

If you’re committed to refinancing, the process is fairly simple. First, you reach out to your lender and make them aware that you’d like to refinance. At this point, you can choose to refinance with them or with a different lender. Go through your options and carefully choose what best suits you. If you choose a new lender, you’ll need to present an ID, vehicle and driving certificates and any proof of ownership.

Regardless of which option you choose, You must meet affordability and credit checks again, just like when you first applied. If approved, the lender will pay off the existing agreement and start charging you for the new finance agreement.

In some cases, when you contact your lender to discuss refinancing, you may face settlement fees to end the agreement early. Your lender will inform you if a fee exists.

As with any agreement, if you don’t make payments, you could face penalties and even repossession of the vehicle. Under the Consumer Credit Act, a car with more than 1/3 of it paid off can’t be repossessed, but you go back to 0 as soon as you take out the new finance.

We’ve covered the refinancing process, but what are the pros and cons of swapping out your existing deal?

The Pros And Cons Of Refinancing

Summary: Refinancing can lower your interest rate, reduce monthly payments, and give you the chance to change your car — but it also carries risks such as higher long-term costs or losing progress on your existing agreement.

Can Refinancing Help With Financial Difficulties?

Summary: Refinancing may help reduce financial pressure by lowering payments or securing better terms, but it isn’t guaranteed — especially if you’re already struggling, as eligibility checks still apply.

In certain circumstances, refinancing can help you lower interest rates and lower payments to something that’s more affordable. While lowering your interest rates isn’t guaranteed, saving on payments can improve cash flow at a time when you need it most.

However, if you’re in financial difficulty and are looking to refinance, you may not be accepted. To refinance, you must re-apply fresh, like when you initially enquired about finance. If you’re in financial difficulty, this could lead to lenders denying your application.

Top tip if you’re unsure whether refinancing will help:

“Before refinancing, calculate the break-even point — the moment when the savings outweigh any fees or settlement costs. If you won’t reach the break-even point, refinancing may cost you more overall.”

Positive And Negative Equity And Its Role In Refinancing

Summary: Your equity position — whether your car is worth more or less than what you owe — has a major impact on your refinancing options.

With refinancing transferring from one agreement to another, you will likely either be in positive or negative equity.
Positive equity is when your car is worth more than what you still owe. In negative equity, the car is worth less than what you still owe. Negative equity increases the cost of refinancing.

In the case of refinancing, positive and negative equity play a major part.

In a positive equity situation, you can put some of the added value towards a new deal, helping reduce monthly payments by paying a large chunk off in one. If you’re struggling to meet payments for a car and want to refinance, being in positive equity could mean an even greater saving at a time when it’s needed most.

On the other hand, negative equity makes refinancing harder. While it’s not impossible, you will likely face higher monthly fees if you’re even accepted for refinancing in the first place. For refinancing to go ahead in negative equity, you’ll have to pay off the difference or accept significantly higher payments and a longer loan term. If you’re in negative equity and looking to refinance, reach out to your lender to see how this would impact you financially. If it’s unclear whether you will actually save in the long run, don’t proceed.

Alternatives If You’re Struggling

If you’re experiencing severe or long-term financial difficulty, refinancing might not be the right option. Free, confidential help is available from organisations such as StepChange, National Debtline, and Citizens Advice.

National Debtline

StepChange

Citizens Advice

Interested In Refinancing? Your Next Steps

If refinancing is something you’re interested in, click here. Our refinancing page is set up to help you explore a new agreement without the pressure of a pushy salesman. Browse and see if refinancing suits you and apply all in one place without impacting your credit score.