If you own a car, refinancing it could be a good financial move to reduce your monthly payments or get a lower interest rate. This process is simple: you get a new loan with better terms, and pay off your old loan. Since the interest rate would be lower, you’d pay less interest overall.
Understanding the benefits and potential drawbacks of refinancing can help you decide if it’s right for you.
Key Points
- Refinancing your car loan can help you secure a lower interest rate, reducing the overall cost of the loan.
- You can also refinance your car loan to change the loan term; extending it can lower your monthly payments but increase the interest paid. Alternatively, shortening it can help you repay your loan faster.
- Refinancing your car loan only makes sense if you can secure better terms and a lower rate, and if the savings outweigh the costs that come with refinancing.
What Is Car Loan Refinancing?
Car loan refinancing involves taking a new loan out to repay your existing loan, ideally with better terms and a lower rate. This can lower your monthly payments, saving you money in interest over the long run. It can also make your payments more manageable and improve your cash flow.
| What is Cash-Out Refinancing? Cash-out car refinancing involves replacing your existing car loan with a new one with a higher loan amount, allowing you to take the difference in cash. You can then use the funds for any reason, including home improvements and debt consolidation. The new car loan often has different terms and interest rates. Just be mindful of the fees associated with this option and any long-term financial implications of increasing your debt load. |
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.
How To Refinance Your Car
Auto refinancing works similarly to the original loan process. Here are the steps to refinance your car loan:
Step 1: Review Your Current Car Loan
Look over your existing car loan, including the interest rate, repayment terms, and remaining balance. You’ll want to know this information when you compare loan offers to refinance.
Step 2: Find Out Your Credit Score
If your credit rating is higher than when you initially took out your car loan, you may be more likely to get a better rate if you refinance. A lower rate can help you save quite a bit of money in interest charges over the loan term. You can check your credit score for free with Loans Canada’s CompareHub tool.
Step 3: Research Lenders And Loan Offers
Compare different lenders and their offers to find the best terms and lowest rates. The fastest and most convenient way to do this is to use a loan comparison site like Loans Canada, which will quickly pull up a list of lenders and their offers to see where the best deals are.
Step 4: Apply For Refinancing
If you determine that refinancing provides you with more benefits than drawbacks, you should apply. Fill out the lender’s application and provide the necessary documents, which will likely be similar to what you needed when you first applied for your current car loan.
Documents Required To Refinance Your Car Loan
| Proof Of Income | Pay stubs, bank statements, or tax returns |
| Government-Issued ID | Driver’s license or passport |
| Vehicle Information | Car’s registration and title documents |
| Current Loan Details | The lender’s name, account number, remaining balance, interest rate, and remaining term |
| Proof Of Insurance | Current insurance documentation |
Step 5: Pay Off Your Existing Loan
Your new lender will pay off your existing car loan, and you’ll start making payments on the new loan.
When Can You Refinance Your Car Loan?
While you can technically refinance your car loan any time, there may be repercussions of doing so before your loan term ends. That said, the best times to refinance your auto loan include the following:
- When Your Credit Score Has Improved: If your credit score is significantly higher since you first took out your car loan, you may qualify for a lower interest rate, which can help you save money over the long run.
- When Interest Rates Dip: When market interest rates decrease, refinancing your car loan can help reduce your monthly payments.
- When You’re More Financially Stable: If your financial situation has improved since your initial loan, you may be able to get better loan terms.
- When Your Current Loan Term Ends: To avoid potential early repayment penalty fees that your lender may charge you for breaking your loan contract early, consider waiting until the end of the loan term to refinance.
Learn more: How Soon Can You Refinance A Car Loan After Purchase?
Are You Eligible To Refinance Your Car Loan?
Anyone with a car loan can typically refinance, as long as they meet specific lender criteria, which may include the following:
- Good Credit: Lenders may look for a good credit score before approving a car loan refinance. The higher your credit score, the better your chances of securing better terms.
- Sufficient Income: You’ll need to show proof of a healthy income and steady job to show the lender that you can afford your new loan payments.
- Adequate Equity: You’ll need to have enough equity in the car to refinance. More specifically, your equity or car value should be sufficient relative to the remaining car loan balance.
- Account In Good Standing: You should have a history of making timely payments in full on your existing car loan.
Are There Fees To Refinance A Car Loan In Canada?
There may be some costs to refinance a car loan, such as:
- Origination Fees: These are fees that lenders may charge for processing the new loan.
- Prepayment Penalties: If you break your loan early, you may be subject to early prepayment penalty fees. Not all lenders charge these fees, so check your loan contract or speak to your lender about these potential costs.
- Closing Costs: There may be costs associated with transferring the car title to the new lender and updating the vehicle registration with the new loan details.
How Much Can You Save By Refinancing Your Car Loan?
To help you understand the potential to save by refinancing your car loan, let’s illustrate using an example.
- Current Loan: Let’s assume you started with a $30,000 car loan with an interest rate of 12% and a loan term of 60 months.
- Remaining Balance: You’ve made 12 payments, and you now have a loan balance of $25,341.29 left.
- New Loan: The refinancing terms are 6% interest over 60 months.
| Remaining Loan | New Loan | Difference | |
| Remaining Car Loan Amount | $25,341.29 | $25,341.29 | $0 |
| Monthly Payment | $667.33 | $489.92 | $177.42 |
| Term Length | 48 months | 60 months | 12 months |
| Interest Rate | 12% | 6% | 6% |
| Total Monthly Payments | $32,032.00 | $29,395.09 | $2,636.91 |
| Total Interest | $6,690.71 | $4,053.80 | $2,636.91 |
Source: Calculator.net
In this example, your new monthly payment would be lower and you’d save $2,636.91 over the life of the loan despite extending the loan term.
Just make sure you factor in any additional costs to refinance (which are not included in this simplified example) to get an accurate picture of how much you could save.
Check out how much your car loan refinance payments will be like using this car loan calculator.
Can Refinancing A Car Loan Impact Your Credit Score?
Refinancing a car loan can affect your credit score in both positive and negative ways.
- Potential Positive Effect: Refinancing could improve your credit score by lowering your interest rate or monthly payments, making it easier to pay on time and reduce debt. Consistent, timely payments on the new loan can also improve your credit history over time. This can offset the initial dip when applying for the new loan.
- Potential Negative Effect: On the downside, applying for refinancing triggers a hard inquiry, which may temporarily lower your score. Plus, opening a new loan reduces the average age of your credit accounts.
Learn more: Does Refinancing Affect Your Credit?
Advantages Of Refinancing A Car Loan
There are plenty of perks that come with auto loan refinancing:
- Lower Your Monthly Payments: If you’re having trouble making your car loan payments, refinancing your car can help you lower your interest rates and increase your term length, both of which would make your payments easier to afford.
- Pay Off The Loan Sooner: Car loan refinancing can also help you pay off your loan early. For starters, the lower interest rate means more of your payment is applied towards the principal. Further, you can opt for a shorter term when you refinance your loan terms.
- Save On Interest: One of the main reasons for refinancing a car loan is the opportunity to secure a lower interest rate. The lower your interest rate, the more you can save in the long run.
- Get Extra Cash: When you refinance a car loan, you can apply for an amount that is larger than what you owe on the car. The extra cash can then be used to cover other expenses or debt.
Disadvantages Of Refinancing A Car Loan
Along with the benefits of refinancing a car loan are a couple of drawbacks to consider:
- Penalty Fees: In order to refinance your car loan, you’ll need to break your current car loan contract. While some lenders allow this, other lenders charge a fee.
- More Interest: If you extend your loan term, it may result in more interest paid.
Can I Refinance My Car Loan In Someone Else’s Name If I Can’t Afford It?
Refinancing a car loan in someone else’s name isn’t typically allowed. Rather than directly transferring the car to someone else’s name, you would likely need to sell the car to another person, then use the funds to pay off your car loan.
The person taking over the vehicle would need to qualify for financing on their own merit, then have the vehicle title transferred to their name.
It is possible for someone to take over your current vehicle and loan, but if there are better terms available, you may need to pay them to take it off your hands.
Learn more: Refinance Your Car In Someone Else’s Name
Should You Refinance Your Car Loan?
In order to decide whether car refinancing is the right option for you, consider the following:
Financial Situation
Consider your ability to make payments and how much you can afford. Weigh this against your willingness to pay off the loan faster, even if it means some frugality.
Additionally, consider whether you will qualify for a better rate. If your credit is better than when you initially signed the contract, refinancing might make sense.
New Loan Term
When you pay out a loan over a longer term, you are paying more in interest. Depending on how well you can make your existing payments, it may be worth discharging the loan faster. Conversely, if you’re struggling and don’t have a long-term solution yet, refinancing is a reasonable option.
| Choose a longer term if you need lower payments and financial flexibility. Choose a shorter term if you can afford higher payments and want to save on interest. |
Monthly Payments
Your monthly payments with a refinance are likely to be lower if you choose to extend your term, but you may end up paying more in the long run. Be sure to factor in your long-term goals and how this will affect you both financially and in terms of credit.
Interest Rates
In most situations, refinancing is sought to get a lower interest rate. Keep in mind that even if you receive a lower interest rate, if you extend your loan term significantly, you may end up paying more. When you make your decision, ensure that you have real numbers for the total you will pay so that you can compare the arrangements objectively.
Tips On Refinancing A Car Loan In Canada
Keep the following tips in mind when refinancing your auto loan:
- Work With A Trustworthy Lender: Ensure the lender is reputable and offers a reasonable interest rate. Additionally, check that you are dealing with a proven institution and read all the fine print. If you are unsure as to the meaning of a phrase, it is better to ask.
- Consider All Costs: Take a look at the cost of refinancing the vehicle. Are there any upfront expenses? Are you going to be paying more down the line? If so, how much more? Make sure that you have all of the information above before making your decision.
- Avoid Deals That Seem Too Good To Be True: Understand your rights and the lender’s responsibilities. Be certain that you are comfortable with the arrangement and that it is in your best financial interests.
Refinancing vs. Trading In Your Car
Should you refinance or trade in your car? Let’s explore the differences between the two to help you determine when you should choose one over the other.
Refinancing
Refinancing your vehicle can help you secure a lower interest rate and lower your monthly payments if you’re able to qualify for a lower rate and better terms. You can still keep your car without having to sell it for a cheaper vehicle.
Trading In Your Car
Trading in your car gives you the chance to get a newer vehicle or one that’s more affordable. You can use the proceeds of the trade-in to put toward the purchase of another vehicle, thereby potentially cutting costs on a new car purchase.
Learn more: Should You Refinance Or Trade-In Your Car?
Alternatives To Refinancing Your Car Loan
If you miss payments or anticipate financial trouble, consider other alternatives to refinancing your car loan. Here are a few options:
Make Extra Loan Payments
While this tactic requires financial strength, making extra payments toward your principal can help shorten the loan term and reduce the total interest paid.
Loan Modification
Modifying your loan involves negotiating directly with your lender to lower your payments or extend the loan term to reduce your monthly payments. You could also ask the lender to provide temporary relief if you’re struggling financially.
Final Thoughts
Refinancing can be a help you lower your costs and interest paid on your loan. However, it’s important that you consider all the costs to ensure it’s worth it.
