Is it a good idea to refinance?

You may have been approached with offers to refinance, or seen information, about refinancing vehicles you currently have on finance.  We are going to buck the trend and say that this isn’t necessarily the most sensible or economic thing to do.

So to break it down, what is refinance?

Refinance

Financing an asset that was purchased outright, financed or currently on finance to either free up capital or reduce monthly outgoings.

I want to focus on the use of refinance to reduce monthly outgoings on an existing agreement, as this is very rarely the right solution for any business.  This is for the following reasons:

1. You will be paying interest on interest
2. Refinance attracts higher rates than standard asset finance rates

An example of this is below:

Original Agreement

Balance to finance = £30,000.00
Term = 5 years
Monthly payment = £622.39
Flat rate = 4.9%
Interest payable = £7,343.40

Refinancing the agreement 3 years in would result in the following:

Refinance Agreement

Amount to finance = £14,937.36
Term = 5 years
Monthly payment = £319.87
Flat rate = 5.7%
Interest payable = £4,254.84

By refinancing this asset, you are significantly increasing the interest payable, as well as extending the monthly commitment by a further 5 years.  Therefore unless in reasons of distress, the monthly reduction isn’t enough to warrant the increase in interest.

Whilst refinance rates are higher than standard asset finance rates, refinance can be a useful tool if used correctly.

An example of this would be if you had unencumbered vehicles that you purchased outright, and you were looking to raise capital to start a business development program.  In this scenario, as the assets were purchased outright no interest has already been paid and the refinance rate would be considerably more attractive than loans for cashflow purposes.  The best solution in this case, would have been to have funded the vehicles at point of purchase, as the rates would be more competitive at this point and of course the funds would have been free to utilise in the business giving the best return on capital employed!

At Focus the most important thing to us, is that you find the right solution for your business, whilst there is a slim chance this could be by refinancing an existing agreement, give us a call to talk through all your options before making a decision.