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Refinancing your car loan

Want to get a better deal on your car loan? Consider refinancing.

For many, auto loan refinancing means saving money every month by changing lenders and searching for a more competitive loan. But it’s not a guaranteed process — even if you are approved for an auto refinance loan, you may not get a better deal that lowers your monthly repayments significantly.

How does auto refinance work?

When you opt for auto loan refinancing, you’re basically switching from one lender to another — preferably one that offers you a more competitive interest rate or fewer fees. The new loan amount typically covers the amount remaining on your previous loan, including any prepayment fees or closing costs. When you compare your refinancing options, you’ll want to be looking for the deal that saves you the most money every month and over the life of your loan.

Even if you can’t score a lower interest rate, you may be able to extend your loan term. But this method has its pros and cons. Your monthly payments may be lower, but you’ll often end up paying more in interest than if you’d stuck with your original lender.

For the most part, you’ll be going from one secured car loan to another when you refinance your auto loan. This means that your car will still be held as collateral while you repay the loan, which adds its own risks. If you borrow more than your car is currently worth, you may become upside down on your loan. Auto loan refinancing isn’t the best choice unless you can be sure your new loan will really cost you less.

Benefits of refinancing an auto loan

It may not always be the best idea, but if your interest rate is above 6%, refinancing your auto loan may save you money. Here are a few other reasons to consider refinancing:

  • Reduce monthly repayments. If you borrowed when your credit wasn’t great or when interest rates were high, refinancing at a lower rate could save you on interest and lower your monthly repayment.
  • Work with a better lender. Not all lenders are created equal. Some have better customer service, easier account management and add-ons or discounts that may not have been available with your previous lender. Just make sure you’re still getting a good deal on your new loan.
  • Improve your credit score. If you’ve been struggling to make your repayments every month, then your credit may have seen a dip. Refinancing at a longer term could help you lower your monthly repayments, making it easier to handle your loan and improving your credit along the way.
  • Remove a cosigner. If you’ve been paying on your auto loan regularly and want to remove a cosigner, refinancing can be a quick and painless way to remove a cosigner while potentially saving money.
  • Maximize cash flow. Alongside lowering your repayments, you could use auto loan refinancing to maximize your cash flow. However, you’ll likely need to opt for a personal loan rather than a car loan if you want to use your funds for more than just refinancing.

What should I look for in auto loan refinancing?

Every lender offers different terms and has loans with different features, so don’t let a low potential APR dazzle you. Take your time and compare everything that goes into borrowing, including the lender’s legitimacy and the fees it charges.

  • Loan amount. Make sure that the lender you choose offers enough money to cover your current loan amount. Otherwise, you could be paying more in interest and still having to pay for some refinancing fees out-of-pocket.
  • Interest rates. Check the maximum interest rate the lender charges. This way, you’ll know the highest potential cost of the loan and can better compare it to your current loan.
  • Fees. Ask about the fees a potential lender will charge you — including prepayment penalties, monthly maintenance fees, origination fees — to see if refinancing is worth it.
  • APR. Annual percentage rate (APR) reflects the amount of interest you pay yearly on a loan (including any fees and costs paid to get the loan) and is often considered the best way to compare loan offers. Check your potential refinance offer against your current loan to see which costs less every year.
  • Repayment flexibility. If you’re currently struggling to meet your repayments, find out how flexible a potential lender is with changing payment dates, automatic payments and late fees.
  • Legitimacy. Read reviews and give customer service a call. If it’s difficult to get a clear answer about rates and fees — or if you don’t get an answer at all — you’ll know it’s best to move on.

When is auto loan refinancing a good idea?

Although auto loan refinancing isn’t always the best idea, it can net you a little extra cash every month, especially if you know when it’s the best time to apply.

  • When you’ve improved your credit score. One of the best times to refinance an auto loan is after you’ve improved your score. You may be able to score a lower rate through refinancing, which means you’ll pay less every month and less over the life of your loan.
  • When you need to lower your monthly repayment. Life circumstances can change and make your current loan repayments unaffordable. With auto loan refinancing, you’ll likely be able to find a lender that can lower it — either by extending your loan term or offering you a more competitive interest rate.
  • When you financed through a dealership. Financing through a dealership isn’t always the worst way to go, but more often than not, your auto loan will be marked up. If you took out a loan through a dealership instead of an independent lender, you might want to see what kind of rates you could get by visiting a bank or online lender.
  • When interest rates are dropping. Interest rates are influenced by the economy. If you notice that interest rates are falling, take advantage of it by applying for auto loan refinancing. You may not get the lowest rate out there, but you could walk away paying less on interest than you did previously — definitely a big win for your budget.

When should I avoid refinancing?

Refinancing your auto loan may not always be the best financial choice. You may want to avoid refinancing if:

  • You’ve been late on car payments. Not only will this lower your credit score, it also makes you look like more of a risk to lenders. Many auto loan refinance lenders will want you to have multiple months of timely payments in order to qualify.
  • You don’t have a regular source of income. If you don’t have a regular way to make payments, lenders are unlikely to consider you. You’ll have to supply proof of income — not necessarily employment — to qualify for most refinancing.
  • You’ve taken on more debt. Taking on more debt increases your debt-to-income ratio (DTI), which lenders look at to make sure you can afford repayments. If you’ve recently started on a new credit card or borrowed a personal loan, you likely won’t be in the best position to borrow.
  • You have an older car with significant mileage. Although there are lenders that will refinance a vehicle no matter its age or mileage, most want to see vehicles under certain limits. This way, you avoid borrowing money on a car that might not retain its value.

Can I refinance if I'm upside down on an auto loan?

It’s possible, but it might not be the best idea. If you’re already upside down on your car loan — meaning you owe more for the car than it’s worth — you may have to put up additional collateral to cover the remaining loan balance.

Refinancing can help you turn your car loan around. Some lenders even offer loans specifically for this situation. However, not all lenders are willing to work with upside down loans, so you might want to reach out to customer service first to make sure you’re eligible.

Can I qualify for a lower rate on my auto loan?

It depends on a few factors. Lenders are more likely to approve you for a lower rate if

  • Your credit has improved. Your credit score is often the most important factor when it comes to getting a good deal on a loan. But as long as you’ve been making on-time repayments on your current auto loan for at least six months, your credit score has likely improved.
  • Your income has increased. The more you make, the less likely lenders are to consider you a risk. This often results in being offered lower rates.
  • You’ve paid off some debts. If you had credit card debt or loans when you first got your car loan that you’ve since paid off, you’ll have proof that you’re good with your finances. And the less risky you look to a lender, the more likely you are to be approved for a lower rate on an auto loan.

Can I refinance if I have bad credit?

You can, but you’ll want to make sure it’s a smart financial move. If you borrowed your first car loan at a similar credit rating, you’re unlikely to really lower your interest rate by refinancing. However, if you’ve since raised your credit, you may be able to refinance your car loan and get a better deal.

On the other hand, you can lower your monthly payment by refinancing at a longer term, which could make it easier to repay your loan and start building your credit. But you should make sure you won’t owe more on your loan than what your vehicle is worth. Otherwise, you may be taking on a longer loan term and paying more in interest without really benefiting.

Once you’ve made sure refinancing is the right decision, know that there are lenders that accept borrowers with bad credit.

How do I refinance my auto loan?

Once you’re sure refinancing is the right choice for you, it’s fairly easy to refinance your loan.

  1. Review your current loan. Make a list with your lender, remaining balance, interest rate, monthly payment and loan term. This will make the comparing future offers that much quicker.
  2. Check your credit. For most people, it doesn’t make sense to go into the auto loan refinancing process without knowing the score lenders will be seeing. You’re entitled to a free report from each of the major credit bureaus each year, so make sure you get your credit score before you start applying.
  3. Check the value of your car. You can visit sites like Canadian Black Book, autoTrader.ca, or CARFAX to see the approximate value of your car. If it’s worth less than the amount you want to borrow, you may have a harder time refinancing.
  4. Compare your options. Check with banks, online lenders, and private lenders to see what refinancing options may be open to you. Make sure you meet the eligibility criteria and are aware of all fees and charges. Once you’ve found a few good options, contact the lender directly or visit its website to apply.
  5. Apply for preapproval. Many lenders offer preapproval for auto loan refinancing. This allows you to see the amount you may qualify for before you complete a full application — and take a hit to your credit.
  6. Review your offers. After you’ve received a preapproval offer or two, take a look at the payments you’ll be making including the amount dedicated to interest alone. Check to see if you’ll actually be saving money by refinancing with a new lender.
  7. Complete a full auto loan refinance application. Once you’ve decided on a lender, you can go through with the application process. The lender may require extra information about your current lender and your vehicle, so be sure you have this handy when you apply.
  8. Pay off your previous loan. Your new lender may do this on your behalf or may require you to organize payoff yourself. Whoever does it, make sure your account with the previous lender is closed.

What will I need to refinance my auto loan?

In order to complete the refinancing process, you’ll need to provide information about yourself and your vehicle, just like when you applied for your original loan. Your lender will typically also request information about your current loan so it can calculate a competitive offer.

Every lender has a different process, but you can generally expect to supply

Information about yourself

  • Full name
  • Date of birth
  • Email address
  • Phone number
  • Residential address
  • Employment status
  • Proof of income
  • Proof of citizenship
Information about your vehicle

  • VIN (Vehicle Identification Number)
  • Current mileage
  • Vehicle make, model and year

Information about your loan

  • Your current lender
  • Remaining loan balance
  • Current loan term
  • Amount you want to finance

Bottom line

Auto loan refinance doesn’t have to be a complicated process. As long as you know how to compare new loans against your current loan, you may be able to find a better deal that lowers your interest rate or monthly repayments — or both. However, you aren’t guaranteed a better deal. Carefully consider all of your options and your current financial situation before applying.

And if you’re not sure where to start, you can always read our guide on car loans to make sure you have everything ready when you start the auto loan refinance process.

Frequently asked questions

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