If your monthly car payments feel too high, or you think you could get a better interest rate, it may be time to refinance a car loan. Refinancing allows you to replace your existing auto loan with a new one, ideally with better terms, lower payments, or a reduced interest rate.
This can free up cash, help you pay off your car sooner, or even improve your financial stability.
While refinancing is an option worth considering for drivers in Canada, you must understand the process, requirements, and potential benefits. This guide will walk you through everything you need to know, including when refinancing makes sense, how to qualify, and how to get the best deal.
Refinancing an auto loan means taking out a new loan to pay off your existing car loan. The new loan usually comes with different terms—such as a lower interest rate, a different repayment period, or a reduced monthly payment.
For example, if you originally took out a loan with an interest rate of 8% but now qualify for a 5% rate, refinancing could save you a significant amount of money over the life of the loan.
In Canada, many car owners choose to refinance vehicle loan to:
While refinancing can be a smart financial move, it’s not always the right choice for every situation.
One of the most common reasons to refinance is to secure a lower interest rate. If rates have decreased since you took out your original loan, refinancing could help you save money.
Check with sources like the Bank of Canada to track current interest rates and see if you qualify for a lower one.
If your credit score was low when you first financed your vehicle, you may have received a high interest rate. Over time, if your score has improved due to consistent on-time payments and responsible credit use, you might now qualify for a better rate.
There are several ways to check your credit score for free.
If you’re struggling with car payments, refinancing can help by extending the loan term. While this means you’ll pay more in interest over time, it can reduce financial strain in the short term by lowering your monthly payment.
If you initially needed a co-signer to qualify for a loan but no longer need one, refinancing can allow you to remove them. Similarly, if your credit situation has changed, adding a co-signer with better credit could help you get a lower interest rate.
Not all lenders offer the same flexibility, customer service, or repayment options. If you’re unhappy with your current lender, refinancing allows you to switch to one that better suits your needs.
Before refinancing, gather details about your existing loan, including:
Some lenders charge fees for early repayment, which could impact your decision to refinance.
Your car’s value affects whether you qualify for refinancing. If you owe more than your car is worth, known as being “underwater” on your loan, refinancing may not be an option.
Use valuation tools like:
Lenders will assess your creditworthiness when considering your refinance application. A higher score increases your chances of qualifying for a lower interest rate.
In Canada, you can check your credit for free through:
A credit score above 700 typically qualifies for the best rates, but even a moderate improvement from your original score could lead to savings.
Don't just accept the first offer. Consider options from:
Some lenders may advertise low interest rates but include hidden fees. Read the fine print and compare total loan costs before making a decision.
Lenders will require specific documents to process your refinance application, including:
Having these ready will speed up the approval process.
Submit applications to multiple lenders to compare offers. Lenders like Clutch provide pre-approval without impacting your credit score, allowing you to review options before committing.
Once you choose a lender, they will pay off your existing loan, and you will begin making payments under the new loan terms. Ensure your vehicle’s title is updated to reflect the new lender.
Refinancing a car loan can be a strategic financial move, but it also comes with potential downsides. We break down the key benefits and drawbacks so you can make the right decision.
If refinancing doesn’t seem like the right option, consider these alternatives:
Considering a vehicle upgrade? Browse Clutch’s online inventory for the best deals.
Refinancing a car loan in Canada can be a great way to save money, lower monthly payments, or secure better loan terms. The key is to evaluate your current loan, check your credit score, and compare refinancing options from multiple lenders.
If you are considering buying a new car or trading in your current vehicle, Clutch has hundreds of quality used vehicles to choose from and our trade-in process provides a seamless experience. We offer transparent pricing and our 10-Day Money-Back Guarantee ensures you're completely satisfied with your vehicle.
Refinancing requires a hard credit check, which may temporarily lower your credit score. If it results in lower payments and better financial management, the long-term benefits often outweigh the short-term impact.
Leasing and refinancing are separate. If you want to keep your leased car, you may need to explore a lease buyout loan rather than refinancing.
Some lenders require at least six months of on-time payments before allowing refinancing, while others allow it as soon as your original loan is processed. Auto loan pre-qualification takes only two minutes to complete with Clutch. You also get a response within 24 hours.
Yes, but you may not qualify for the best rates. We consider other factors like length of credit and debt-to-service ratio, so having bad credit doesn't necessarily mean Clutch can't help. If your credit score is low, improving it before applying for refinancing can help secure better terms.
