Refinancing Your Car Loan in Canada


Are you coming to the end of your car loan term but still find you owe money on your car? Or maybe you’re struggling to make the payments on the car loan you have right now. While there are many reasons drivers need or want to make changes to their vehicle financing and get out of a car loan, we have good news. Refinancing a car loan in Canada could be a good solution.


What is Refinancing?

Refinancing is a term that applies to many different kinds of loans, not just auto loans. 

Refinancing replaces an existing loan with a new loan. The new loan gets used to pay off what’s owing on the old loan. Ideally your new loan should come with better terms or features to help improve your financial situation. However, the details depend on the type of loan and on your lender. Here’s how it might look if you’re working to refinance an auto loan in Canada.

Let’s say you’re three years into a five-year car loan. You want a better loan – maybe a lower rate, or a larger loan to buy a bigger car since your family has grown.

You could look for a lender with better loan terms or approach your current lender to ask about refinancing your car loan. You apply for the new loan, get approved and the new loan gets applied to pay off the total balance you owe on the old car loan. Now you’ll continue making payments on your new loan until you choose to pay it off or refinance it with another new car loan. You make payments on the new loan until you pay it off or refinance it.


Who Should Refinance a Car Loan

Is it a good idea to refinance an auto loan in Canada? It all depends on your financial situation and your goals. Here are five situations where refinancing your auto loan could make sense.


#1. You need a reliable, safe vehicle

First of all, it’s important for you and your family to have access to a safe, affordable and reliable vehicle. Is your current car unsafe to drive? Or do you find yourself struggling to pay for unexpected repairs every few months? If so, it could be a good idea to look at refinancing your auto loan to get into a newer, more reliable set of wheels.


#2. You’re struggling to make your current car loan payments

What if you find it tough to make your current car loan payments? Maybe your household income is lower now than it was when you qualified for your loan because someone lost a job or became a stay-at-home parent. 

You could refinance to a longer-term loan, which means you would have a longer time to pay off the money you owe and each of your regular payments would be lower.


#3. You’ve improved your credit score

Another time Canadian drivers might decide to refinance a car loan is when they’ve improved their credit scores. 

Remember when you first got your auto loan? Your interest rate and other terms were based on your credit score at that time. Regardless of the reason, if you had to get a car loan or some other loan while you had bad credit, your interest rate will reflect that. So you might have a loan or two with a high-interest rate. 

The good news is that once you’ve improved your credit score, you might find you can refinance those loans at a lower rate. This will help you save money and/or lower your payments and even pay off your car loan faster.


#4. Car loan interest rates have dropped

Interest rates rise and interest rates fall. It’s possible that today’s rates are lower than they were when you first got your car loan. For example, say you’re paying 7% on your loan but today’s rates are 4%. You could save money, lower your payments or shave some time off your car loan if you refinance to today’s rates. 

Even if you can’t get a lower interest rate due to bad credit, you could still try to find a loan with a longer repayment period and lower your monthly payments.

Keep in mind that more time spent paying back your loan is also more time spent paying interest. In general, you’ll pay more interest overall if you have a loan with a longer term.


#5. You want to consolidate other debts

In addition to saving money and lowering your payments when you refinance an auto loan, sometimes you can also consolidate your debts. This means taking a new loan to pay off a number of smaller loans. When you refinance to consolidate, you might find you can lower your overall interest rate, your monthly debt payments, or both. 

You might find that you cannot refinance your car loan to consolidate other debts through your original auto lender or dealership but only through your bank. If this is the case, talk to your auto lender about getting into a new, lower-rate loan (refinancing just your auto loan) and compare the rate and loan terms against those offered by your bank. Depending on the situation, you just might find it’s worthwhile sticking with your original auto loan lender.


What to Watch for if You’re Refinancing

While an auto refinance can help you get into a better car and ease a tight financial situation, you also need to keep in mind that there can be costs that come with choosing to refinance.

Watch out for fees and transaction costs to “break” your old loan and process your new one. There is some paperwork involved for the lender to work through a car loan refinance in Canada, so ask if you’ll have any fees to do so. Also, if you’re refinancing from a higher interest rate car loan to a lower rate loan, the lender may charge you a “penalty” fee for the lost interest.

If you’re looking to lengthen your loan term and get lower regular payments, watch out for higher interest costs. You might get a higher rate, especially if your credit score isn’t as good now as it was when you got your first loan.

Is your car older than seven years? If so, you could have a tough time refinancing your car loan because some lenders are reluctant to lend money for an older vehicle. Instead, ask about trading it in and using the value as a down payment to help get you into a newer vehicle.

Another thing to watch for is refinancing into a loan that will leave you owing more on your car than it’s worth if you trade it in. With longer-term car loans getting more popular in Canada, this could become a more common risk for Canadians trying to refinance their auto loans.

According to a 2018 CBC news report, over half of all new car loans have terms of 84 months (that’s seven years) or longer. And if you refinance partway through, you could find that you still owe money for an aging car when it’s getting close to the time that you’ll need a new one.

Recently, Global News reported that these longer loans can lead to what’s called “negative equity” – a situation where drivers owe more on their car loans than the car is worth. If you have a negative equity situation and try to trade in your vehicle for a newer model before your loan term ends, you’ll end up with an even bigger loan as you try to pay off the old one plus take on the new one.


Why Refinancing Could Cost You More in the Long Run

It’s important to understand that refinancing your current car loan can end up costing you more money in the long run. Yes, it’s true. Refinancing can backfire. 

When you stretch out loan payments over an extended period, you pay more interest on your debt. You might enjoy lower monthly payments, but that immediate benefit can be offset by the higher lifetime cost of borrowing. 

Try using an online car loan calculator to check and see how much it really costs you to refinance. Remember to add in any penalties, fees, or administration charges. 


Where to Go For Refinancing Car Loans in Canada

When it comes to an auto loan refinance, Canadians have options. You might find you can refinance through your original lender. Or you might decide to refinance through a different credit institution, bank or lender. You could even refinance online.

Refinancing a car loan has many pros and cons. It’s important to consider the benefits and drawbacks of a lower payment, lower rate, bigger loan or bigger car – only you can decide on the right choice for you. After all, everyone’s financial situation and lifestyle is a little different. Yet one thing is certain – you need to take action if you want to make a change. 

If you’re looking for a fast, simple refinance, fill out an online application right now and one of our representatives will reach out to you shortly.

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