Everything You Need to Know About Auto Refinancing

Everything You Need to Know About Auto Refinancing

Written by Caitlin Wood
Last Updated July 18, 2022

There are plenty of reasons someone may want to refinance an auto loan. Most involve changing the length of your term, reducing your monthly payment, or adding or removing a person from the loan. Whatever your motivation may be, it is important to note that everyone’s financial situation is unique. This article will help you understand the potential outcomes and considerations of refinancing to help you decide if it’s right for you.

How Does Auto Refinancing Work?

Refinancing a car loan involves taking on a new loan to pay off the balance of your existing car loan. It’s pretty simple. You trade in your current vehicle, the dealership gives you a trade value and pays that toward your current loan. Whatever remaining balance you have is then added to your new vehicle loan. People generally refinance their auto loans to save money, as refinancing could score you a lower interest rate. As a result, it could decrease your monthly payments and free up cash for other financial obligations.

Can You Refinance With Bad Credit?

Refinancing your car with bad credit can make financial sense, under the right conditions. A bad credit auto refinance can free up a significant amount of money or save money on future payments. You can lower your interest rate, reduce monthly payments, and extend the term of the loan. If you were making timely payments with the previous auto loan or recently increased your credit score, you could qualify for a lower interest rate and even get a loan with a prime lender that you did not qualify with when you took out your initial loan!

Is it Difficult to Refinance an Auto Loan?

Absolutely not! Lenders typically see a good credit score as a sign of a less risky borrower, which in turn can lead to offering better interest rates. If your credit score has improved since you took out the loan, you might be able to save money on interest through a refinance. If you have some credit issues, refinancing is still an option. Consult with a credit manager from a trusted dealer or someone from your bank to get information specific to your financial situation.

Is it Worth it to Refinance a Car?

There are many good reasons to consider refinancing. One of the most popular is getting a better interest rate on your loan. But there are other ways refinancing can be worth it for you as well:

  • Refinance without paying more for your car.
  • Add extra time to your payoff period with new loan terms.
  • Use a down payment to lower your debt.
  • Add or remove someone from your loan.
  • Buy a new vehicle and use your trade-in to lower your loan.

Auto refinancing has many potential benefits, but there are other perks as well. When bundling your loans together you can often have other financial products, such as GAP protection, added to your new loan.

Why is GAP Insurance Important For Certain Loans?

In the event of a total loss, or write-off, the insurance company only pays the actual cash value of the vehicle. Guaranteed Asset Protection, commonly known as GAP insurance, makes up the difference between the actual cash value of the automobile and the amount still owed to the finance company. Any time the auto loan amount exceeds the value of the vehicle it is advisable to purchase GAP insurance. Right from the start, most loans will carry a higher balance as soon as you drive the car off the lot. This is especially the case for higher interest loans and cars that depreciate more quickly. In the event of a total loss of your vehicle, GAP insurance will protect you from having to carry over the debt of two vehicles into a third vehicle loan.

As you can see, there are plenty of factors to take into consideration when it comes to auto refinancing. By having a good understanding of your financial situation and your vehicle needs, you should be able to make an informed decision on whether it is the right choice for you.

This article was contributed by Clutch, Canada’s first online dealership.

Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.

Click on the star to rate it!

How useful was this post?

Research & Compare

Canada's Loan Comparison Platform

Largest Lender Network In Canada

Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.

Save With Loans Canada

Special Offers

Borrow $500-$50,000

Borrow $500-$50,000

Don’t pay until March with this offer from our partner, Fairstone.* Ends January 31st.

View Offer
Cashback & Bonus Offer

Cashback & Bonus Offer
Ends March 1st, 2023

New Offer! Get up to $2,000 cashback + a $50 bonus on signing up. Conditions apply.

View Offer
Earn 5% Cash Back With Neo

Earn 5% Cash Back With Neo
No annual fee!

Earn an average 5%¹ cash back at thousands of partners and at least 0.5%² cashback guaranteed.

View Offer
Build Credit For $10/Month

Build Credit For $10/Month

With KOHO’s prepaid card you can build a better credit score for just $10/month.

View Offer
Best Personal Loan Provider by Greedy Rates

Confidential & risk-free

All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.

When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.

Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.

Your data is protected and your connection is encrypted.

Loans Canada Services Are 100% Free. Disclaimer

Build Credit For Just $10/Month

With KOHO's prepaid card you can build a better credit score for just $10/month.