Refinancing a Car Loan in Canada: How To Do It?

If you can’t afford your monthly repayments, it might be time to make some changes to your loan.

Read more about how refinancing a car loan in Canada works, the benefits you could get and the pitfalls to avoid. 

What Is Car Loan Refinancing?

Simply put, refinancing an auto loan is when you take out a new loan with a more favourable term and rate to pay off your current loan. That way, you can make smaller monthly payments (since they will be spread out over a longer term) and enjoy a lower interest rate. 

To refinance your car loan, you need to apply for financing with your existing lender—provided they give you a better deal than your current loan rates. If not, you can apply with a new car loan provider. 

The money you get will be used to cover your outstanding loan balance, as well as any early repayment fees charged by your lender. After that, you can proceed to pay off your new car loan in weekly, bi-weekly or monthly instalments. 

Auto refinance loans may seem like an ideal solution, but they may come with significant drawbacks, so double-check the terms offered before you make any rash decisions.

When is Refinancing a Vehicle a Good Idea?

There are several instances when refinancing can work for you. These include

• Your credit score has improved since you got your original car loan and you can now qualify for better rates
• You are earning more thanks to a new job or a raise, which also increases your chances of getting a better deal
• You have paid off your credit card debt or settled your other liabilities, thus reducing your debt-to-income (DTI) ratio
• Your interest rate is too high—it is more affordable to switch to another lender if you are paying double-digit interest rates on your car loan
• You want to pay less every month so you extend the term of the loan 
• You have a cosigner on your loan that you want to remove
• You are not happy with your existing lender and you want to switch providers
• You need the extra cash—switching your car loan for a better deal means you can save the money you were paying on interest and use it for other expenses

How to Refinance a Car Loan in Canada?

See if you qualify for refinancing

Although each lender has their own criteria when it comes to car refinancing, there are several factors most of them take into account.

• Your affordability (your credit rating, debt-to-income ratio and your income)
• The balance on your current loan
• The value of the vehicle, its condition and the mileage 
• The minimum loan amount—some lenders will not approve refinancing applications for loans under $5,000

Again, every lender is different so check the eligibility criteria before you apply. 

Compare lenders and their refinancing options

Car loan providers have different offers for refinancing a car loan, but the process of comparing is no different than when you first took out the loan. This means you need to look at the following factors

• The loan amount—make sure that the amount offered is enough to cover your existing loan (plus fees)
• The cost of the new car loan—check beforehand if there will be any application fees, late repayment charges and administration costs, These might add up to your monthly repayments. 
• The lender’s eligibility criteria 
• The lender’s repayment policy—How flexible are repayments? Can you pay the interest early? 
• The interest rate—double and triple-check that the interest rates offered are lower than what you are currently paying. 

Once you select a few offers suited to your needs and budget, apply for pre-approval for a loan. This will give you the best idea of how high your monthly loan repayments will be, without making an official loan application (which will take a hard hit on your credit score).

Check the terms of your current loan

You probably know all this, but it’s a good idea to recheck the specifics of your loan, such as

• How much are you paying each month
• How much is left on your loan
• What is your current interest rate
• How much will your lender charge for settling the loan early

You can use this information to compare the pre-approval offers and see whether refinancing is an option worth pursuing. For instance, if the new lender has higher interest rates than the ones you are currently paying, refinancing your car loan will end up costing you more in the long run. 

On the other hand, if you’re getting better deals or you want to pay less in monthly installments by stretching out the loan term, you can move on to the next step.

Apply for refinancing 

To apply for car refinance in Canada you will need to provide some basic documents and information, including 

• Personal ID 
• Proof of income (usually your pay stubs from the last 3 months)
• Proof of insurance 
• Information about your car, such as the make, model and year, mileage & the VIN 
• Tax information, such as your most recent filing records
• Information about your current loan, including 
  • Details about your lender
  • The outstanding loan balance
  • The loan term
  • How much do you want to borrow

When approved, review the paperwork and if everything is in order, sign on the dotted line to seal the deal. The FCAC advises checking whether you are entitled to a “cooling off” period when buying or refinancing your car, so contact your provincial or territorial consumer affairs office for more information.

Is Refinancing a Car Loan a Good Idea?

As mentioned above, refinancing an auto loan is not the right choice for everyone. In fact, it  depends on your personal situation, but in general, refinancing may not be the best option for you if

You have bad credit

While you can refinance a car loan with bad credit, it might not be the wisest decision as you won’t have access to lower interest rates or favourable terms. This means that you will be moving to a worse deal and paying more in the long run. 

The same applies to borrowers who have taken on more debt since they first applied for a car loan or have irregular or no income. 

You have less than 12 months on the loan

If you have less than a year on your existing car loan, it might be better to pay off the loan sooner and avoid the risks of a long-term car loan. 

Your current lender has high early payment charges

Any savings you make on lower interest rates will be offset by high prepayment charges so check your loan agreement (or contact your lender) to see how much you will pay for settling the loan early.

Your car is not in the best condition

If your vehicle is older and has acquired a lot of mileage, you might not be able to get a decent refinancing deal. In fact, most lenders will reject the application if the vehicle is older than 10 years or has a mileage of over 100,000 miles.

The same goes for borrowers with an upside-down car loan (when the outstanding balance on the loan is worth more than the car). In this case, it might be better to try to sell the car privately or trade it in with a dealer. 

Bottom Line: Should You Refinance Your Car Loan?

Ultimately, you need to decide this for yourself. 

There are pros and cons to refinancing a car, especially if your financial situation has improved since you took out the initial loan—this way, you will pay less in interest over time and potentially save a lot of money. Your monthly payments will increase, though. 

On the other hand, if you’ve taken on more debt, extending the term of the loan will lower your monthly payments and give you some time to get your finances in order. That said, a longer loan term accumulates more interest so you could pay more for the vehicle than you intended. 

It would be best to talk to a professional who can help you decide if refinancing is the way to go.