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Refinancing A Car Loan
📅 Last Updated: December 20, 2023
✏️ Written by: Corrina Murdoch
🕵️ Fact-checked by: Caitlin Wood

Every year, you go through long-term budget arrangements and try to find new ways to save. Car refinancing has the potential to improve your monthly budget. Those who entered into a subprime auto loan and have since gotten a raise, reduced debt, or improved their credit, may be eligible for refinancing. To learn whether auto refinancing is the right step, it’s important to learn the options available to you. Armed with this information, you can make an informed decision and choose the best possible refinancing arrangement.

Who Can Refinance My Car Loan?

You can choose to refinance your car loan with your current lender or a new one. If you don’t want to visit a bank or a dealership, you can opt for an online lender like SafeLend. It’s the only company in Canada that can help you refinance your current car loan all without trading in your vehicle.

What Do You Need To Auto Refinance? 

Since refinancing isn’t much different than making a car purchase, chances are you already have most of the information you need. However, before you take the leap, be certain that you are eligible to refinance your car loan. 

Consider whether you have defaulted on the lease or are in good standing. Be sure that your credit score and working situation are stable and viable for refinancing. Provided you are eligible for the new loan, the next step is getting your documents together.  

Documents Required To Refinance Your Car Loan

  • Tax Information – Tax information is a common request, so bring your most recent filing records. 
  • Pay Stubs – Three months of pay stubs from your employer are necessary as well. 
  • Bank Information – Plan ahead and bring your banking details. Often, people go with a void cheque to speed up the process and eliminate the chance of errors. 
  • Personal Identification – You will also need relevant identification. Both a government-issued photo ID and a second identification are required. A driver’s licence and a passport are both suitable options. 
  • Vehicle Information – Additionally, be sure to have all the necessary details for your vehicle. Registration documents work well for this purpose. 

Ensuring that you have all the essential documentation is not only important, but it is also a great way to speed up the process and develop a better rapport with the lender. Preparing ahead of time gives you a good opportunity to highlight all reasons for refinancing in an organized manner. 

How Does Car Refinancing Work? 

The process of auto refinancing is actually fairly straightforward. It works in a similar manner to the original purchase. However, unlike haggling about the value of the vehicle, you are locked into the cost associated with the original purchase. Essentially, the new lender buys your debt (pays for the car’s remaining value) and then lends that amount to you, typically at a lower rate and with an improved term.

Steps To Refinance A Car In Canada

There is some key information to gather before taking the leap. 

Step 1. Find Out If Refinancing Is The Right Option For You

Before applying to refinance, consider the following to see if it’s the right option for you: 

  • Has Your Credit Score Improved? – Has your credit score gone up significantly in the recent past? If you find that your rating is drastically higher than when you initially took out your car loan, you will likely get a better rate if you refinance. 
  • Can You Get A Lower Interest Rate? – Did you get your vehicle when interest rates were really high? It happens to countless households across the country. Many chose to refinance their vehicle when interest rates lower.
  • Where Do You Stand Financially? – If you have recently come across difficult times; situations like unexpected expenses or even a decrease in income, you could find yourself unable to make regular payments. Instead of having a poor payment history on your credit, refinancing can make things more affordable. On the other hand, if you have gotten a pay increase which you can substantiate with pay stubs, it can be wise to look into refinancing, too. This means that your income-to-debt ratio has improved and you could qualify for a better loan arrangement.

Step 2. Do Your Diligence 

Approach the lender and discuss the interest rates available, along with any fees you will be expected to pay. Find out if there are penalties associated with refinancing and learn what the term of the new loan will be. Determine whether the costs of refinancing, both immediate and over the long term. From there, you can decide if it is amenable to your financial situation. 

Step 3. Apply For Refinancing

If you’re able to determine that refinancing provides you with more benefits than drawbacks, you can apply for refinancing. Be sure to compare offers from various lenders to secure the best rate. You can use an online loan comparison platform like Loans Canada to get multiple offers with a single application.  

Advantages Of Refinancing A Car Loan

  • 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 Of The Loan Sooner – Car loan refinancing can also help you pay off your loan early due to two reasons. One, the lower interest rate means more of your payment is going towards the principal and two, you can opt for a shorter term. 
  • Save On Interest – As mentioned, 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 on it. 
  • 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 any other expense.

Disadvantages Of Refinancing A Car Loan

  • 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 called a prepayment penalty.
  • More Interest – If you extend your loan term, it may result in more interest paid. 

Should You Refinance For A Longer Or Shorter Car Loan Term? 

In order to decide how to approach your refinancing, there are some key things to consider. A key aspect is the duration of the new car loan term. The term of the agreement dictates what it will cost you in the long run. Loans with a shorter term will cost more on a monthly basis, though will end sooner. This results in less interest payments over time. 

Conversely, longer-term agreements have smaller monthly payments. However, that does not mean you will ultimately pay less. Long-term loans have more time to compound the interest. It results in your paying a significantly higher price for the vehicle than you would with a shorter term. Check out how much your car loan refinance will cost you using this car loan calculator.

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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 out 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 entered into the agreement, you should be fine to proceed. 

New Loan Term

When you pay out a loan over a longer term, you are eventually spending more in interest. Depending on how well you are able to make your existing regular 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.

Monthly Payments

Your monthly payments with a refinance are likely to be lower if you choose to extend your term. You will end up paying more in the long run. Often, during financially trying times, it is easy to think about the short term. However, it is essential that you factor in your long-term goals and how this will affect you both monetarily and in terms of credit.

Interest Rates

In most situations, refinancing is sought to get a lower interest point. Keep in mind that even if you receive a new lower interest rate, if you extend your loan term significantly, you may end up paying more in the long run. 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

Just like with any financial arrangement, it is important to keep your eyes out for red flags. 

  • Ensure that the lending agency is reputable and offers a reasonable interest rate. Make sure that you are dealing with a proven institution and be sure to read all the fine print. If you are unsure as to the meaning of a phrase, it is better to ask. 
  • 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 responsibilities of the lender. Be certain that you are comfortable with the arrangement and that it is in your best financial interests. 

Auto Refinancing FAQs

Can I refinance my car if I have bad credit? 

Every lender has different standards for auto refinancing. Many are willing to work with those having poor credit. However, in these situations, the terms of the loan are seldom as favourable. Consider the merit of the offer and whether it is worth it to enter into the arrangement. You could spend time improving your credit first and use that increase to get better terms. There are many approaches to this, such as secured credit cards, which can contribute to your improved state of credit. 

Where can I refinance my car loan? 

There are many options for loan refinancing. Investigate the options open to you based on your credit, income, and amount of debt. Consider the new rate of interest and the duration of the loan itself. Generally, consumers are able to pursue refinancing with the same lender that issued the first car loan. Best-suited towards those who have improved their financial situation (reduced debt, gotten a raise, etc.). However, in order to find optimal rates, it’s helpful to investigate other options. If you find yourself unable to qualify for refinancing through standard means, private and alternative lenders are excellent options. This is particularly useful to those experiencing financial hardship. 

Will refinancing my car loan affect my credit score? 

Almost everything that you do financially impacts your credit score in one way or another. While refinancing does negatively impact your credit, it is both short-lived and nominal. Since it is you taking on more debt, the decrease is warranted. However, the decrease is replacing an existing debt. This results in the impacts being minimal. 

Final Thoughts

There is a time and a place for most things, including car refinancing. Whether you signed on with a high-interest rate and want to reduce expenses or simply had a windfall, continual financial assessment is essential to long-term success. So long as you keep your long-term financial goals in mind, refinancing can be a rewarding opportunity. 

Corrina Murdoch avatar on Loans Canada
Corrina Murdoch

Corrina Murdoch has been a dedicated freelance writer and editor for several years. With an academic background in the sciences and a penchant for mathematics, she seeks to provide readers with accurate, reliable information on important topics. Working as a print journalist for several years, Corrina expanded her reach into the digital sphere to help more people gain insight into the realm of finances. When she's not writing, you can find Corrina swimming and spending time with family.

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