How to Refinance an Auto Loan in Canada in 2024?
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Sometimes your existing car loan just no longer makes as much sense as when you signed it.
A car loan refinance can be a good move for your wallet when either interest rates or your financial situation changes.
In this article, we explore how car loan refinancing works, how to do it and how to get the best deal.
How does refinancing a car loan work?
When you refinance a car loan, you take out a new car loan that replaces the old one. Your new lender pays off the existing loan balance and obligations to the original lender, while starting a new agreement with you.
Your new car loan can sometimes be with your existing lender, but, more typically, will be with a new one. When refinancing your car loan you may be offered lowered interest rates, lower or higher payment terms, or lower monthly payments.
Let's assume that you owe $22,000 on your old car, have 45 months of payments remaining and pay 5% interest. Your monthly payment would be $537.17. If you refinanced at a higher 6% rate over 60 months you could drop your monthly payment to $425.32.
Here is what that might look like. When deciding you may have to weigh lower monthly payments vs less total interest.
| Auto loan | Original | Longer | Shorter |
|---|---|---|---|
| Loan amount | $22,000 | $22,000 | $22,000 |
| Term (remaining months) | 45 | 60 | 36 |
| Interest rate | 5% | 6% | 4% |
| Monthly Payment | 537.17 | $425.32 | $649.53 |
| Total interest | $2,172.58 | $3,519.30 | $1,383 |
Why refinance an auto loan?
Refinancing may be a good option for you if:
- You are currently paying a high interest rate
- Your monthly payments are too high and are struggling to keep up with them
- You wish to remove a cosigner from your car loan
- You want to change lenders
- You want cashback
What are the pros and cons of refinancing your car loan?
Refinancing an auto loan in Canada is a great option for many, but it’s not without its drawbacks. Let’s look at the main advantages and disadvantages of refinancing.
Auto refinancing pros
- Lower interest rates: This is one of the main reasons people switch car loans. You may have accepted a high-interest-rate loan initially due to a low or non-existent score. If your score has improved over time or the market has changed, you may now qualify for lower-interest-rate loans.
- Lower monthly payments: Your lender may allow you to lower your monthly payments by stretching-out payments over a longer term. This can be a lifesaver for those who are struggling to meet their monthly payments.
- Speed up repayment: You can opt for a loan with higher monthly payments to pay off your car loan quicker and save money on interest.
- May improve your credit score: Any new debt (refinancing included) initially lowers your credit score, but after making timely payments on your new car loan, your credit score will bounce back to its previous score or higher.
- You may be eligible for a cashback.
- Remove a cosigner: If your credit has improved since you bought the car, you may be able to remove a friend or family member's name from the loan.
Auto refinancing Cons
- May not save you much: If you don't have an established credit history or have bad credit, you may not reap any financial benefit from refinancing your car loan.
- Interest rates may be higher: If you have an older car, you may be surprised that you’re being offered a higher interest rate than when you originally financed it. This is due to the value of cars depreciating over time.
- You may pay more total interest: Choosing to extend your loan term is likely to increase the overall interest you pay.
- Fees: Your original loan lender may charge you a prepayment penalty when you switch lenders.
What interest rates can I get when I refinance?
If you have a good credit history you can expect car refinancing interest rates to start as low as 5%, but they go much higher than that depending on the term and market conditions.
One of the main reasons people refinance their car loans is to benefit from a reduced interest rate. The interest rate a lender will offer you will be determined by three main factors:
- Your credit score: the higher your credit score, the greater your chance of securing a lower interest rate. Ideally, your credit score would be over 700.
- Your income and current debt: Lending money to clients who already have outstanding debts or a low income is risky for lenders. To offset this risk, they may offer a higher interest rate.
- Your car’s condition: If your car already has some mileage, it’s more likely to break down meaning unexpected payments. It makes sense for lenders to increase their interest rates - to protect their financial investment.
Can I refinance if I have bad credit?
So what do you do if you want to refinance your car loan but have bad credit? Refinancing your car loan with a poor credit score can be tricky, but it’s far from impossible.
Here’s what you should do if you want to refinance your auto loan but have poor credit:
- Consider getting a cosigner: Some lenders will provide more favourable loan terms for borrowers with lower credit scores if they have a cosigner. A cosigner is someone that puts their name alongside yours on a car loan, therefore agreeing to take responsibility for the payment of your car loan if you are unable to keep up with payments. Usually, cosigners are family or friends who have good credit scores.
- Start taking steps to improve your credit score first: We’ve created a guide to help you build your credit score so that in no time you’ll be able to access more favourable car loans.
- Compare refinancing options with different lenders: Lenders sometimes offer very different interest rates from one another. Comparing can help save you serious money.
How soon can I refinance my car loan?
Sometime between 6 months and 2 years may be an ideal time to refinance. It gives an opportunity for a credit score to improve and to make some inroads on the initial payments while the car is still valuable. If you wait too long to refinance, your vehicle may not be worth enough for a lender to accept a refinance.
There isn’t usually an imposed length of time. Some lenders will even allow you to refinance your car loan a few months after signing up for one. That being said, you’re unlikely to be successful in refinancing your car loan with your existing lender if your financial situation has not changed.
Expert advice
If you want to move to a different lender, you might owe fees to your existing lender for breaking the contract. It’s worth verifying your current loan terms before making a change.
How do you refinance a car loan?
Here are 3 steps to refinancing your auto loan in Canada:
- Research: See what the different car loans available to you. You can use our auto loan calculator to work out what your monthly payments will be and how much interest you’ll pay.
- Speak to your current car loan lender: Be sure you understand the terms of breaking your contract early, including any potential fees.
- Get your documents together and apply: Where possible try not to leave an auto refinance loan until the last minute. It can take some time to weigh up all your options and receive a response from lenders.
What do I need to refinance my car?
Refinancing your car loan is straightforward in that the list of documents needed will largely be the same as those submitted for your initial care loan. The key documents to have on hand include
- An ID: A passport or driver's license for example
- Proof of income: Your last 3 pay stubs and your tax return
- Bank details
- Details on your vehicle: including the year, make, model and mileage
What does it mean to be upside down on a car loan?
Being upside down on your car loan means your car loan’s outstanding balance is greater than the car’s current value. This is most common with loans that offer lower monthly payments but longer terms, but of course, this can happen naturally over time as a car’s value depreciates. As loan terms get longer and longer in Canada (up to 96 months!), this isn't uncommon.
Can I get cash back when I refinance a car loan?
A perk of refinancing your car loan is that you can sometimes get cashback. This works by taking out a larger loan than the car is worth. This money can be used for anything but does need to be paid back. A good use for this product is to pay down higher-interest debt, like a credit card.
Let's look at an example:
For example
Bea lives in Saskatoon and is two years into an auto loan on her Ford F-150. She still owes around $35,000 on it, but also has $10,000 in credit card debt. She refinances her loan for $45,000 at 8%. This lets her pay off her credit card debt at 23%. This consolidates her debt, lowers her monthly payments and buys her some financial flexibility.
Just remember that cashback from refinancing isn't free money. It needs to be paid back, so be careful not to borrow too much money, especially If the interest rate is high.
