Like most other loan types, car loans come with obligatory monthly loan payments. But what if your car payments are a bit too expensive for you to comfortably handle? Or what if you want to shave a few hundred dollars off the overall interest amount you have to pay on your current loan?
In these scenarios, refinancing your car loan might help. But is refinancing really that much cheaper than sticking to your original car loan?
What Does It Mean To Refinance A Car?
Car refinancing involves replacing an existing auto loan with a new one. The idea behind car refinancing is to obtain another loan with better terms and a lower rate, which can help you lower your payments and interest and save you money over the long run.
If you think you’ll be able to qualify for a car loan at a much lower rate than what you’re currently paying on your existing car loan, then refinancing might make sense.
For example, maybe you happened to lock in a car loan when the going rate was much higher, or perhaps your credit score has vastly improved since you initially took out your car loan and you are now able to qualify for a lower rate. Either way, refinancing at a lower interest rate can be a huge money-saver and a good reason to refinance your car loan.
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.
Should You Refinance Your Car?
When is it the right time to refinance your car loan? There are a few situations in which a car refinance might make sense:
1. Your Financial Situation Has Changed
Your lender will assess your finances before approving you for a car loan and deciding what type of interest rate you qualify for. The more income you earn, the less of a risk you’ll be for your lender, in which case you may qualify for a lower rate. If your financial situation has improved since you initially took out your car loan — whether through a salary raise or a decrease in debt — you may be eligible for a better interest rate when you refinance.
2. Your Credit Score Has Improved
Your credit score is another key metric used by lenders to assess the eligibility of a borrower for a loan. If your credit score has improved over the years, you may be in a better position to qualify for a lower interest rate today through refinancing and lowering your monthly payments.
3. You Have A High-Interest Rate
When you first took out your car loan, rates may have been a lot higher compared to where they are today. Even if your financial situation and credit score haven’t changed, you may be able to get a lower interest rate through refinancing simply based on where current rates stand today.
4. You Want Lower Payments
If you want to lower your monthly car payments because they’re too expensive, you could extend the loan term by refinancing. That way, you’ll have a longer period of time to repay the full loan amount, which means the loan would be spread out over additional payment periods. It’s important to note that this option may make your payments lower, but it can cost you more in the long run.
Are you having a hard time keeping up with your car loan payments? Consider deferring your car loan payments.
5. You Want To Tap Into Your Car’s Equity
If you need some extra cash for a large expense, you may be able to use the equity you’ve built up in your vehicle through regular loan payments. If you still owe money on your car loan, your equity would be equivalent to the vehicle’s current value, less your loan balance. Your lender will set its own rules for the maximum amount you can tap into.
Benefits Of Refinancing Your Car Loan
There are several perks to refinancing your car loan, including the following:
- Get A Lower Interest Rate. The biggest perk to car refinancing is locking in at a lower interest rate, which can help reduce monthly payments and decrease the overall loan cost.
- Extend The Loan Term. Another way to lower your monthly car loan payments involves extending your car loan term, which you can do through a car loan refinance.
- Work With A New Lender. If you’re not satisfied with your current lender, you may be able to switch lenders when you refinance your car loan.
- Get Cash Back. If you need access to a large sum of money, you may be able to tap into your car’s equity through a car loan refinance.
- Remove A Co-Signer. If you initially had a cosigner on your loan when you originally took it out as a way to get approved, you may no longer require that financial back-up. Whether you’d like to remove the co-signer or the co-signer wants their name removed from the loan, you may be able to do so by refinancing.
Learn how you can refinance your car in someone else name.
Risks Of Refinancing Your Car Loan
Along with the benefits of refinancing your car loan are a few drawbacks to consider, including the following:
- You Can End Up Paying More Interest If You Extend The Term. Extending the loan term can mean lower monthly payments, which will make the loan easier to fit within your budget. But this will also mean you may be paying more in interest over the long run unless you’re able to lower your interest rate enough to counter the effects of extending your term.
- Prepayment Penalty. Breaking your current car loan could mean you may have to pay an early repayment penalty fee. Be sure to check the terms of your current car loan to find out if any such penalty fees apply, and if so, how much they are.
Is It Cheaper To Refinance A Car?
As mentioned, one of the more popular reasons for refinancing a car loan is to save money. With a lower rate, there are potential savings to be had. But there are also some fees associated with car loan refinancing that you should be aware of that could offset any savings you’d realize. It’s important to weigh the costs of refinancing with potential savings.
To illustrate the cost of refinancing, we’ll look at how much you’ll pay for the regular car loan vs how much you’ll pay if you stop your original loan to refinance.
Cost Of A Regular Car Loan
| Loan Amount | $20,000 |
| Interest Rate | 13.5% |
| Term | 5 years |
| Monthly Payment | $460 |
| Total Paid | $27,600 |
| Total Interest Paid | $7,600 |
Now let’s say you decide to refinance your car loan after you complete 2 years of your current car loan. The table below shows that you’d pay $6,007 in interest (instead of $7,600) if you refinance and you’d be paying $45 less each month. When deciding to refinance ensure that your savings outweigh the fees your lender may charge you for refinancing.
Cost Of Refinancing A Car Loan
| Car Loan | Refinancing | |
| Loan Amount | $20,000 | $13,565 |
| Interest Rate | 13.5% | 6.5% |
| Term | 5 years (but 3 years remaining) | 3 years remaining |
| Monthly Payment | $460 | $415 |
| Total Paid | $11,040 (in 2 years) | $14,940 (over remaining 3 years) |
| Total Interest Paid | $4,605 | $1,402 |
Find out if you should refinance your car or trade it in?
6 Steps To Refinance Your Car Loan
How Do You Refinance A Car Loan?
1. Evaluate Your Car Loan Details
Review your car loan statement and find the details regarding your remaining loan balance, current interest rate, monthly payment amount, remaining loan term, payoff amount (how much you’d have to pay to close out the loan), and prepayment penalty, if applicable.
Using these figures, weigh the fees you’ll be charged for closing out your loan early against any potential savings you may realize from refinancing.
2. Review Your Finances
If you find that the savings you’d get from refinancing are favourable, you can move on to the next step: reviewing your finances. Whether you refinance with your current lender or another one, it’s important to understand their lending criteria. That way you can verify what they’re looking for and compare it to what your current financial situation looks like.
You need to make sure that you meet the minimum requirements to qualify for a refinance, which will save you a lot of time, hassle, and unnecessary credit checks.
3. Gather Your Documents
You’ll need certain documents to apply for a car loan refinance, including your current pay stubs, banking information, and photo identification. You’ll also need to provide your vehicle information, including year, model, make, trim, and mileage.
4. Get A Quote – Prequalification
It’s important to shop around with different lenders to compare various options to ensure you’re getting the best deal. You should be able to do this easily by using an online aggregator that populates quotes from multiple lenders for an easy side-by-side comparison.
It’s also helpful to get pre-qualified or pre-approved to see what your chances of car refinancing approval are. This step will also move the process along faster once you’ve made a formal decision to refinance.
5. Complete The Loan Application
Once you have all the required documentation, you can formally apply for a car loan refinance by filling out an application form and supplying all the necessary paperwork the lender needs to assess your application.
6. Start Refinancing
Once you’re approved for a car loan refinance, you’ll need to pay off your old loan. Then, you’ll start making new monthly car loan payments according to your new financing arrangement.
Additional Reading
When Is Refinancing A Bad Idea?
While there are plenty of reasons to refinance your car loan to help reduce your financial obligations, there are some situations in which a refinance might not make financial sense:
- You’re Close To The End Of Your Loan Term. If you’re only a few months away from fully paying off your car loan, it may not be worth it to pay the fees associated with a refinance. Instead, just stick it out over the remainder of the term and get rid of the loan completely.
- The Penalty And Fees Outweigh The Savings. Refinancing only makes financial sense if the savings you’d realize substantially outweigh the costs of refinancing.
- You Have An Old Car Or High Mileage. The age of your car and its mileage have a direct effect on your car’s value. You may not be eligible to refinance if you have an old vehicle with high mileage.
- Your Finances Have Gotten Worse. If your credit score has dipped or your income has taken a hit, you likely will not qualify for a lower interest rate compared to what you’re already paying.
- You Have An Upside-Down Loan. Lenders don’t typically refinance a car loan if it’s upside down, which means the loan amount is higher than what the vehicle is worth.
Car Refinancing FAQs
Does car refinancing hurt your credit?
Can I refinance my car and get cash back?
Can I refinance my car if I have bad credit?
Who can I refinance my loan with?
Can I refinance if I have an upside-down loan?
Final Thoughts
If you’re looking for a way to reduce your monthly car loan payments or want to lower your overall interest payments, refinancing your car loan is a great option. But before you go this route, be sure to weigh the costs of breaking your current loan against the savings of refinancing.
