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Car loans make buying a vehicle easily accessible for many Canadians who don’t have thousands of dollars available to cover the ticket price. But even still, car loan payments can be difficult to cover in some cases, especially if your financial situation has hit a snag.

Refinancing is a common option among many car owners who are looking to reduce their loan payments, but this process can often come with additional fees that might not make it a viable option for some. 

Luckily, refinancing isn’t the only way to lower your car loan payments. Let’s explore some other alternatives to refinancing to reduce your car loan payments. 


Key Points:

  • Refinancing your car loan may be an option if you’re looking to lower your loan payments or extend the loan term, though this may only make sense if you can qualify for a lower rate.
  • Alternatives to refinancing your car loan include requesting a loan modification, trading in your car for a cheaper one, or selling your vehicle altogether if your finances are particularly strained.
  • You may also consider looking into loan payment deferrals to see if you qualify, which would allow you to push out your payments to a later date to give you some time to gather your finances.

How To Lower Your Car Payments Without Refinancing

If refinancing your car loan isn’t an economical option, there are a few other viable alternatives to consider, such as the following:

  • Ask for a loan modification
  • Trade in or sell your car
  • Request a loan payment deferral
  • Revisit your insurance policy
  • Consider a lease buyout
Want To Lower Your Car Payments?

Speak with a Loans Canada representative today and learn how you can refinance your car loan and save. Call us today at 1-877-995-6269 or click here.

Note: Program is currently not offered in Quebec.

Request A Car Loan Modification 

Modifying your car loan essentially means changing the payments on your current loan. The goal is to reduce your monthly payments to make them more affordable for you. 

Unlike refinancing which involves taking out a completely new loan to replace your existing loan with new terms, loan modification involves keeping your current loan, but simply making changes to it. 

Your lender may agree to lower your car payments through loan modification by lowering your interest rate or extending the loan term to give you more time to repay the full loan amount. 

How To Request A Car Loan Modification?

Follow these steps to request a car loan modification from your lender:

Step 1. Speak To Your Lender 

The first thing you should do is get in touch with your lender and explain that you’re experiencing financial hardships that are making it difficult to cover your monthly car loan payments. While not all lenders will agree to modify your loan, some may agree to provide other solutions to help you avoid defaulting on your car loan.

Step 2. Gather Proof 

If your lender agrees to modify your car loan, they’ll first want to verify whether or not your story checks out. As such, you’ll need to supply your lender with some documentation that supports your need for lower car loan payments through loan modification. 

To prove that your financial situation is truly in a compromised state, you can show the lender documents such as:

  • A letter from your employer showing that you’ve been laid off or had your hours cut
  • Proof of injury or disability that’s preventing you from working
  • Pay stubs
  • Bank statements
  • List of current bills and how they may have increased

Step 3. Submit Your Request 

Write a detailed letter (also known as a hardship letter) explaining why you are requesting a car loan modification, the circumstances that have led to this request, and the terms you’d like to have changed. 

This letter should include the following:

  • A detailed explanation about why covering car loan payments is difficult.
  • Information about the circumstances that have led to a reduction in income (ie. job loss, reduction in hours, reduction in pay).
  • Reasons why your current bills have increased (ie. unforeseen medical expenses due to injury or disability).
  • An explanation of exactly how much you can afford to pay in car loan payments.
  • The new terms you are requesting.

Be sure to clearly express your intent to pay the loan in full.

Step 4. Accept Or Reject Lender’s Decision 

Your lender will review your request and either accept, reject, or offer a modified version of your request. As such, be sure to carefully review the new terms your lender offers/accepts. If necessary, you may choose to negotiate with your lender until you reach an agreement you can both be satisfied with. 

Whether you accept or reject your lender’s offer, you should provide an answer promptly.


Trade In Your Car For A Cheaper One

As long as your car loan is still in good standing and your vehicle is worth more than what you still owe on your loan, trading it in may be an option. Speak with your dealer about trading in your current vehicle for a cheaper one.

In this case, your lender will calculate the difference between the trade-in value of your car and what you owe on your existing loan. This difference will be deducted from your new loan amount for your new car, which should mean lower payments.

Can You Trade In A Vehicle That Is Not Paid Off?

What if you’re still paying down your car loan on your existing vehicle? Will you still be able to trade it in?

The answer is yes, it’s possible. This would be referred to as a financed trade. When you trade in your vehicle, the dealership will use the funds from your new car loan to finance your new vehicle to pay off the existing balance on your old car. Anything left over goes towards your new vehicle.

For instance, let’s say your car is worth $20,000 and you still have a remaining car loan balance of $5,000. In this case, the dealership would pay off the remaining $5,000 balance with the funds from the trade-in. The $15,000 would then go towards your new purchase.

What If You Have Negative Equity In Your Car?

If you have negative equity in your  —  which means you owe more than what your car is  —  the process is more complicated. In this case, you would either have to come up with the funds to cover the difference, or roll over the remaining balance into a new loan, which would add to your debt. 

For instance, if you owe $10,000 on your existing loan but your car is only worth $8,000, you have $2,000 in negative equity. If you can’t come up with this money to cover the difference, you may consider rolling that $2,000 into a new car loan. 

So, if you took out a $30,000 car loan, then added the $2,000 from your old car loan, you would end up with a total loan amount of $32,000. You have to be careful here, as your chances of winding up with negative equity again are higher. That’s because you’re adding more debt than you would have if you had not added your previous loan balance to your new balance.    


Sell Your Car

Rather than trade in your car for a cheaper one, you could start from scratch by selling your current vehicle on your own. Selling privately will likely help you get more for your car than what dealers offer on a trade-in value. 

But getting more money for your car by selling privately will involve a lot more legwork on your part compared to simply trading it in. That said, if you’re willing to put in the time and work, selling privately could be more financially beneficial. In turn, you’ll have more money to put towards the purchase of a new car.


Request A Car Loan Payment Deferral 

If you’re struggling temporarily with finances, you might want to consider asking your lender if you can skip a payment or two until you get back on your feet. In this case, your loan payments would be deferred for a specific amount of time, and would later be tacked on to your loan amount at the end of the term. 

In this way, you can get some relief by not having to make payments for a while. But keep in mind that you’ll eventually need to make up for those skipped payments. 

Before you can exercise this option, make sure your lender allows it. The option for loan deferrals should either be specified in your loan’s contract terms, or your lender may require a letter of hardship before agreeing to this arrangement. 

Also, keep in mind that the interest on the deferred loan payments will still accrue, so you could wind up paying slightly more in interest over the life of the loan. 


Revamp Your Car Insurance 

There are other costs associated with owning a vehicle besides loan payments, one of which is car insurance. It’s mandatory to have an active auto insurance policy in effect when you take your car out on Canadian roadways, but that doesn’t mean you have to spend more than necessary. 

There are plenty of ways to reduce the cost of your car insurance policy to help save money without making any changes to your financing, such as the following:

  • Comparison Shop For The Lowest Rates. Before you buy a car insurance policy, shop around with different insurers to find the lowest rate for the coverage you need.
  • Ask About Discounts. Insurance providers offer discounts to clients that fall under several categories, such as students, experienced drivers, drivers with a clean driving record, and those who bundle policies.
  • Increase Your Deductible. Generally speaking, a higher deductible means lower premiums. You can save a few hundred dollars or more each year in premiums if you opt for a higher deductible, which hopefully will never have to be activated.
  • Reduce Your Coverage. Some insurance policies come with all the bells and whistles, but do you really need them all? If not, consider removing unnecessary types of coverage, which can be a great way to lower your premiums.
  • Drive Less. Insurance providers consider how much mileage you put on your car every year when calculating your premiums. If it’s feasible for you, consider leaving your car at home as much as possible to help keep your premiums to a minimum.
  • Buy A Car That’s Cheaper To Cover. Some cars are more expensive to cover than others. Before buying a new car, consider how much it will cost to take out an insurance policy on it first.
  • Improve Your Credit Score. Insurance companies look at credit scores to determine the likelihood that clients will file insurance claims. Having a strong credit score can result in a lower price for a policy.

The money saved on your insurance policy by adopting any one of the above-mentioned measures can help to offset the cost of your car loan payments. 


Consider A Lease Buyout

A car lease buyout involves purchasing your leased vehicle, typically at the end of the lease term, or earlier in some cases. The buyout price will be predetermined in your lease contract and is based on the vehicle’s residual value. This option gives you an opportunity to keep the car rather than returning it to the car dealership.

This may be a good option if you want to keep the car but the payments are a bit too high for you to manage, or if the current lease terms are too restrictive. While this option requires that you pay down the outstanding balance of the lease, you might be able to negotiate the price with the dealer or find a lower rate to reduce any applicable car loan payments. 


Final Thoughts

If you’re looking to reduce your car loan payments, don’t automatically settle for a refinance. Some other ways to lower your payments include loan modifications, trading in or selling your car for a more affordable one, or taking steps to reduce other costs, like your insurance premiums. Weigh your options by assessing your needs and situation before determining the best way to keep your car loan payments to a minimum.


Lower Car Payment FAQs

Can I lower my car payments by leasing my car?

Lease payments are often lower than financing payments because you’re only paying for the depreciation of the vehicle over the lease term, in addition to interest charges, taxes, and fees. Over time, you could save more on a bundle. Once the lease period ends, you can start a new lease or buy the car at a predetermined amount. 

Can I lower my car payment without refinancing? 

Yes, you can reduce your loan payments without refinancing through a process known as loan modification. If you can prove to your lender that you’re having financial challenges that are making it difficult to cover your loan payments, they may be willing to work with you to reduce your payments. This might be either through a reduced interest rate or an extended loan term.

Can I pay off my car loan early?

Yes, you should be able to repay your car loan off early. However, your lender may charge an early repayment penalty fee. Refer to your loan contract or speak to your lender to verify whether or not such charges apply. 

Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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