If your car payments are squeezing your budget or you've spotted better interest rates, it might be time to refinance your car loan. Simply put, refinancing swaps your current loan for a new one with better terms.
This could mean smaller monthly payments, less interest, or paying off your car faster.
Many Canadian drivers consider refinancing, but it's smart to know what you're getting into first. We'll cover when refinancing makes sense, how to qualify, and tips for getting a good deal.
What is car loan refinancing?
Refinancing a car loan means getting a new loan to pay off your old one. The new loan usually has different terms—like a lower interest rate, different payment schedule, or smaller monthly payments.
Let's say you got a loan with an 8% interest rate but now you qualify for 5%. Refinancing could save you good money over time.
In Canada, people refinance their car loans to:
Cut their interest rate and total loan cost
Get smaller monthly payments
Change how long they'll be paying (either shorter to pay it off quick or longer to get smaller payments)
Switch to a better lender
Refinancing makes sense in many cases, but it's not always the right move for everyone
Should I refinance my car?
Refinancing works when your new loan beats your old one. It might make sense to refinance if something's changed that could get you better terms.
If interest rates have dropped since you got your loan, refinancing could lower your monthly payments.
Your credit score matters too. If your score has improved—maybe a bankruptcy fell off your report or you've paid down other debts—you might qualify for a better rate than before. Regularly checking your credit score can help you determine when it's a good time to refinance.
Check if your current loan has a prepayment penalty. Some lenders charge you for ending the loan early. Do the math to make sure your savings from refinancing will cover any penalty fees.
One more thing: avoid refinancing if you're already applying for other loans like a mortgage or personal loan. Each application shows up as a "hard inquiry" on your credit report. Too many of these in a short time can hurt your credit score and make lenders think you're taking on more debt than you can handle.
When should I refinance my car?
The right time to refinance depends on your situation. Here are some good times to think about it:
Your credit score is up and interest rates are down. If market rates have dropped since you got your loan, or your credit score has improved, you could qualify for a better deal. Lenders offer better terms to borrowers they trust to pay on time.
You've paid off a good chunk of your loan. When you owe less than your car is worth (positive equity), lenders see less risk. They might offer better terms since they know the car could cover the loan if needed.
Your monthly payments are too high. Refinancing can lower your payments to fit your budget better. But watch out—sometimes lower payments mean a longer loan term and more interest overall.
You don't like your current lender. If you're not happy with your lender's service, refinancing lets you switch to someone else while possibly saving money too.
How do I refinance my car?
Once you decide to refinance, start by checking out different lenders. As you shop around, ask these questions:
What's the new interest rate and how long will the loan run?
What's included in my monthly payment?
Will I get charged for paying off either loan early?
How does the application work?
After picking a lender and applying, they'll look into your finances. They'll figure out what your car is worth, check your credit, verify your income, and make sure you have car insurance.
Car loan refinancing is quicker than mortgage refinancing—usually about two weeks from start to finish.
When you're approved, you'll likely get a few loan options with different terms and rates. Longer loans usually mean higher interest rates but lower monthly payments. Shorter loans typically have lower interest rates but higher monthly payments.
Your new lender will pay off what's left on your old loan. But keep making payments on your old loan until the switch is complete. After that, you'll start paying your new lender and enjoying the benefits of your refinance.
Benefits and drawbacks of car refinancing
Refinancing your car loan can be smart money-wise, but it's not always the right move. Here's what you need to know.
Benefits
Lower interest rates: If your credit score is better now or interest rates have dropped, you might qualify for a better rate and save money.
Smaller monthly payments: Stretching out your loan gives you more affordable payments and frees up cash for other stuff.
Adjustable terms: You can change your loan to match what you need—pay it off faster or make smaller payments over a longer time.
New lender: Not happy with your current lender? Refinancing lets you switch to someone with better service, lower fees, or better terms.
One payment instead of many: You might be able to roll multiple loans into one payment that's easier to handle.
Drawbacks
More interest overall: A longer loan term often means paying more total interest, even with smaller monthly payments.
Surprise fees: Some lenders charge you for paying off loans early. Check your agreement before refinancing.
Credit score dip: When you apply, lenders check your credit, which can temporarily lower your score. And if your score has dropped since your first loan, you might not get a better deal anyway.
Takes time and work: You'll need to research lenders, gather documents, and compare offers. If you're not saving much, it might not be worth the hassle.
Other auto refinancing options
If refinancing isn't right for you, try these:
Ask your lender to modify your loan: Some will adjust your terms without a full refinance.
Consolidate your debts: If you have several debts, combining them into one loan with a lower rate might help.
Sell or trade in your car: If your car is too expensive, getting a more affordable one might make more sense.
Making the right call on car loan refinancing
Refinancing your car loan boils down to one question: Will it actually help your finances?
If you've got a better credit score now, spotted lower interest rates, or just need more breathing room in your monthly budget, refinancing might be your answer. But it's not for everyone.
Before you jump in, do some homework. Compare what different lenders offer. Add up all potential fees and costs. Think about how long you plan to keep your car.
Sometimes the best move isn't refinancing at all—maybe talking to your current lender about modifying your loan or even trading in for a more affordable vehicle makes more sense.
The bottom line? Refinancing works when it saves you money or makes your life easier. If the numbers add up and the timing feels right, it could be a smart way to take control of your car payments and improve your overall financial picture.
About the author
Grace is a communications expert with a passion for storytelling. This hobby eventually turned into a career in various roles for banks, marketing agencies, and start-ups. With expertise in the finance industry, Grace has written extensively for many financial services and fintech companies.
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