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Refinance an auto loan in Canada
Want to get a better deal on your car loan? Consider these options for refinancing a car loan.
Refinancing an auto loan in Canada can help you save money on your repayments every month by giving you lower interest rates. It can also help you extend your loan term so that your monthly payments become more affordable. Learn about when it might make good financial sense to refinance your car loan and when you might want to stick with your current contract. Also, find out car loan refinancing offers from lenders.
What's in this guide?
- Refinance an auto loan in Canada
- How does refinancing a car loan work in Canada?
- Benefits and drawbacks of auto loan refinancing
- When should you refinance a car loan?
- When should you avoid car loan refinancing?
- How to compare car loan refinancing offers
- Is that new car refinance offer a better deal?
- Can you refinance a car loan with bad credit?
- How to refinance a car loan: a step-by-step guide
Refinance an auto loan in Canada
Compare offers from the lenders below.
How does refinancing a car loan work in Canada?
Refinancing an auto loan in Canada involves borrowing money to pay off your old car loan. You will typically only want to refinance your car loan if you think you can qualify for better interest rates by doing so. For example, you might want to refinance if your credit score has improved substantially or you’re making a much higher income.
When you decide to refinance, you’ll apply for a new loan with a new lender (or with your current lender if they’re willing to reduce your rates). You can use the money you borrow to pay off your old loan plus any closing costs or early repayment charges. From there, you’ll make regular payments on your new loan and hopefully save some money in the process.
Benefits and drawbacks of auto loan refinancing
- Get lower interest rates. Lock in lower interest rates so that you pay less on your loan over time by refinancing with good credit.
- Lock in lower monthly payments. Extend your term to lower your monthly payments if you’re struggling to repay your loan.
- Switch to a different lender. Pick a lender with better customer service or lower rates than your former provider when you refinance your car loan.
- Get cash back. Get cash back when refinancing an auto loan for a larger amount than what you owe for your car.
- Not a good option if you have bad credit. You won’t be able to take advantage of lower interest rates if you have bad credit.
- Prepayment penalties. You could end up losing money if you get lower rates but have to pay penalties for closing your old loan contract early.
- Pay more in interest if you extend your term. You could end up paying more in interest if you extend your term (even if your monthly payments are smaller).
When should you refinance a car loan?
You’ll typically only want to refinance your car loan in a couple of situations.
- Your credit score has improved. Your credit score is often the most important factor when it comes to getting a good deal on a car loan. If you’ve been making on-time repayments toward your current auto loan for the past 6 months, your credit score has likely improved. Because of this, you could get a lower rate through refinancing, which means you could pay less every month and over the life of your loan. You can apply for preapproval with a new lender to see if you qualify for better rates.
- Your income has increased. The more you make, the less likely lenders are to consider you a risk. If your income has increased, consider refinancing a car loan for a lower rate and shorter loan term. If you can afford the higher monthly payment that comes with a shorter term, you could save thousands on interest in the long run.
- Your debt has decreased. If you had credit card debt or other 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. In addition, you’ve likely lowered your debt-to-income (DTI) ratio. This shows lenders that you can afford your repayments, especially if you plan on shortening your loan term. The less risky you look to a lender, the more likely you are to be approved for a lower rate when you refinance.
- Your interest rate is high. Having an interest rate over 10% is generally a sign you may be better off finding a new lender — even if your credit hasn’t improved much. This is especially true if interest rates have dropped across the board due to the current lending market. You may not get the lowest rate out there, but you could walk away paying less in interest than you previously were.
- Your car loan is through a dealership. Dealerships are notorious for marking up interest rates to increase their own profits. If you got financing through a dealership instead of a third-party lender, you might want to see what rates you could qualify for by refinancing an auto loan. Even if you keep your remaining loan term the same, auto loan refinancing with a new lender at a lower interest rate can save you hundreds over the life of your loan.
- You want lower monthly payments. You may want to extend your term to lower your monthly payments. In this case, you might get the same interest rates as you had before but extend the amount of time you have to repay the money you borrow. If your circumstances have changed and you find yourself unable to keep up with repayments — or even if your payments are just larger than you’d like — refinancing your car loan may be a good solution. You may be able to find a lender that can lower your monthly repayments by extending your loan term or lowering your interest rate — or both. This can help you avoid defaulting on your car loan and losing your vehicle.
- You want to work with a different lender. You might want to refinance your car loan if you’re dissatisfied with your current lender for some reason. In this case, you should do plenty of research before deciding on a new provider to make sure they’ll be a better fit.
- You want to remove a cosigner from your loan. You could decide to refinance if you want to get someone off of your loan agreement. For example, maybe your parents helped you cosign the loan but now your credit is good enough to manage on your own.
- You want to refinance to get cash back. You might want to refinance your car loan for a larger amount than what you owe to tap into the equity in your car. This will let you borrow enough to pay off your old loan contract and get a bit of extra cash on the side.
When should you avoid car loan refinancing?
You should avoid auto loan refinancing in the following situations:
- Your credit score has gone down due to late payments. You’ll want to avoid refinancing an auto loan if your credit score has gone down since you first applied. This can happen if you’ve missed bill payments or you have outstanding bills that have been sent to collections. In general, lenders want to see multiple months of on-time payments before approving you for refinancing.
- You have a year or less left on your loan. It can be tempting to stretch your term out to get lower monthly payments. Just keep in mind that the sooner you pay off your loan, the less interest you’ll pay and the quicker you’ll own your vehicle outright.
- Your current loan has high prepayment penalties. You might want to avoid refinancing if your current loan will charge you high fees for early repayment. Check your loan contract or contact your lender to find out more about prepayment fees. You might not save much if you have to pay extra fees to get out of your original loan contract.
- You’re planning to sell your car soon. It probably doesn’t make sense to refinance your vehicle if you’re planning to sell it right away. In this case, you can simply make the sale and use the money you get to pay off your car loan.
- You don’t have a regular source of income. If you can’t prove to a lender that you can make your monthly payments, it’s likely that you’ll be denied a loan offer. You’ll have to supply proof of income — not necessarily employment — to qualify for most auto loan refinancing options.
- You’ve taken on more debt. If you’ve recently opened a new credit card or borrowed a personal loan, you likely won’t be in the best position to refinance your car loan.
- 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 10 years old or 100,000 miles. This way, you avoid borrowing money on a car that might not retain its value.
- Your car is worth less than your loan balance. Lenders are generally unwilling to refinance a car loan if it’s upside down — when your car loan is larger than what your car is worth.
- Your loan comes with front-loaded interest. If you paid most of the interest on your car loan in the first few months or years, you don’t stand to save much by refinancing.
How to compare car loan refinancing offers
You’ll want to compare the following features of your loan to make sure it’s a good fit for you:
- Loan amount. Make sure that the lender you choose can give you enough money to pay off your current car loan as well as any fees you’ll have to pay for closing early.
- Interest rates. Double-check that the rates you’ll pay with the new lender are lower than what you’re currently paying to guarantee that you’ll save money in the long run.
- Fees. Find out what fees your new lender will charge you to set up and maintain your loan as well as what penalties you might incur to pay it off early.
- Repayment flexibility. Learn more about the lender’s policies for handling late payments or changing repayment dates to accommodate your cash flow.
- Reputation. Make sure the lender you want to switch to has positive online reviews and a good reputation for customer service.
Is that new car refinance offer a better deal?
Use this calculator to compare your existing loan with a potential refinanced loan to see how much you can save over time.
Can you refinance a car loan with bad credit?
You can get auto loan refinancing with bad credit, but you’ll want to make sure it’s a smart financial move. This will only be the case if you’ve improved your credit rating since you first applied for your car loan (even if your score is still under 650). It could also make sense to refinance with bad credit if you have a higher income or you’ve paid off significant debts.
Another reason you might like to refinance with bad credit is if you can’t make your current monthly payments. In this case, you might be able to refinance to get a longer term, which will bring down your costs every month. Just be aware that this means you’ll pay more in interest over time unless you’re also able to secure lower interest rates.
Can I refinance an auto loan if I’m upside down on that auto loan?
You typically shouldn’t refinance your car loan if you already owe more than what your car is worth (which is what being upside down on your car loan means). While refinancing a car loan can help if you can lock in lower interest rates, your lender will usually charge you higher rates since your asset won’t cover your loan payments if you default.
You may want to consider waiting until you’re in a better position to refinance your loan, such as when your payments catch up to the value of your vehicle. You can also consider selling your vehicle or trading it in for a less expensive vehicle and paying the remaining balance that you owe if you just want to get rid of the debt quickly.
How to refinance a car loan: a step-by-step guide
Below are 8 steps that break down how to refinance a car loan in Canada.
Step 1: Review your current car loan.
Check your loan statement or log in to your account to find the following information:
- Monthly repayment
- Current interest rate
- Remaining balance
- Payoff amount
- Remaining loan term
- Prepayment penalty, if any
- Lender’s customer service number
While you’re reviewing your loan documents, weigh any fees you’ll be charged for paying off your loan early against potential savings from refinancing an auto loan to make sure it’s worth it.
Step 2: Check the value of your car.
Your car’s current value will determine how much you need to borrow — and if refinancing your auto loan is a viable option. To get an idea of how much your car may be worth, visit sites the Canadian Black Book or Autotrader.ca. Your vehicle’s make, model, mileage and condition, as well as where you live will all impact its overall value.
If your car is worth less than the amount you want to borrow, you could end up paying much more for your car than it’s worth. Instead, you might want to consider selling it privately or trading it in at a dealership for a less-expensive alternative.
Step 3: Check your credit and eligibility.
Factors like your credit score, debt-to-income (DTI) ratio, current loan amount and vehicle will all play a role in whether your refinancing application is approved.
Many refinancing providers also have a minimum loan amount they’re willing to refinance, which may be around $5,000 or more. If your current car loan is less than the lender’s minimum, your application won’t be approved.
In addition, lenders also have limits on the car itself: A vehicle over 10 years old or with more than 100,000 miles will be much more difficult to refinance than a newer vehicle with less mileage.
Every lender is different, so review its specific eligibility criteria before you apply to avoid a rejection — and an unnecessary hit to your credit score.
Step 4: Compare your auto loan refinancing options.
Research lenders that offer car loan refinancing to see what eligibility requirements you’ll need to meet and how much you may be able to borrow.
When comparing your options, consider the cost, term and how much your monthly repayment will change with your new loan.
Step 5: Apply for preapproval.
Many car loan refinancing providers offer pre-approval, which allows you to see what rates and terms you might qualify for before completing a full application — and taking a hit to your credit score.
Pre-approval forms are generally available on the lender’s website, and you may know your potential terms within minutes of submitting it.
What information do I need to refinance my auto loan?
Every lender has a different process, but most ask for some or all of the following information at some point in the application process:
- Full name
- Date of birth
- Email address
- Phone number
- Residential address
- Employment status
- Driver’s licence
- Proof of income
- Proof of citizenship
- Proof of insurance
- Social Insurance Number (SIN)
- Vehicle identification number (VIN)
- Current kilometres
- Vehicle make, model and year
Information about your loan
- Your current lender
- Remaining loan balance
- Current loan term
- Amount you want to finance
Step 6: Review your pre-approval offers.
After you’ve received a pre-approval offer or two, calculate your new monthly payment to see if you’ll actually save money by refinancing. You should also consider outside factors like perks and discounts to make sure you’re getting the best deal available to you.
Most importantly, compare your new loan against the terms of your old one. If your previous car loan has a prepayment penalty or if the new car loan has a higher rate, it may not be worth refinancing.
Step 7: Complete the full application.
Once you’ve decided on a lender, reach out to submit a full application. If approved, review your new loan documents to make sure you understand the lender’s terms and conditions. Confirm your new payment due date, interest rate, loan term and potential fees. If you agree to the terms, sign your loan documents to finalize the agreement.
Step 8: Pay off your previous car loan.
Your new lender will either pay off your old car loan directly or transfer the funds to your account so you can pay it off yourself. Regardless, reach out to your old lender to confirm your payment has been processed and your account has been closed to avoid any headaches down the road.
How does the coronavirus outbreak affect car loan refinancing?
You might be able to get a better deal if you waited to refinance your car loan during the coronavirus outbreak. After the Bank of Canada lowered rates to between 2.45% in March 2020, many car loan providers also lowered their rates.
But you’ll still need to shop around to make sure you’re getting the most competitive rate. And you still need to meet the lender’s requirements — which typically include having good credit and a steady source of income.
If you’re struggling financially due to COVID-19, see our guide on what to do if you can’t afford your repayments. Contact your lender to discuss your situation. Many providers are offering support for those financially affected by the outbreak.
Exploring your options for auto loan refinancing 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. Just make sure to consider all of your options and your current financial situation before applying.
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