Drive Your Payments Down: The Benefits of Car Loan Refinancing

Drive Your Payments Down: The Benefits of Car Loan Refinancing

Posted on March 21, 2023

Our auto loans department has been fielding a few calls over the past week or so around auto loan refinancing. It seems an upward trend with more queries than usual, which prompted this quick explainer post. We asked our auto loans team to explain refinancing a car loan. How it works, frequently asked questions, reasons to use car loan refinancing in Canada and more.

This is what they came up with.

How Car Loan Refinancing Works

Auto loan refinancing basically replaces your existing loan with a new one with different terms.

When you apply for the new auto loan, you pay off the old one in full and continue paying the new loan with the new terms. It’s a very simple process.

For example, you have a car loan originally at $45,000 and you have paid off $15,000. Your car is now worth around $32,000, you have 4 years left to pay and you’re paying around $700 per month.

You could refinance that loan down to $30,000 to lower your monthly payments. You could extend the term up to 5 years to lower your payments down to $613 per month or you could shorten the loan term so you pay more per month for a shorter time.

If you had more equity in the car, you could get a loan for the car’s value to pay off other debts or free up cash.

You can use an auto loan calculator to work out the effects of your options.

Can You Refinance a Car Loan if You Have Bad Credit?

Yes, you can refinance an auto loan if you have bad credit. If you qualified for the original loan and nothing has changed, you’ll very likely qualify to a new one. Much will depend on affordability, your credit score, the amount you need and your situation.

It is entirely possible to refinance if you have bad credit. It won’t be cheap but it is certainly possible!

Car Refinancing a Car Loan Affect My Credit Score?

Refinancing an auto loan will impact your credit score to begin with. Every hard inquiry on your credit report will slightly reduce your score. Any increase in debt to income will also have a minor impact.

However, the score will quickly recover and the regular monthly payments of the loan could help to increase your credit score over time.

Reasons to Refinance Your Car Loan

Lower monthly payments: Refinancing an auto loan to lower the monthly payments is a very common reason for wanting to do it. It’s probably the most common reason to refinance a car loan. You can refinance for a lower amount using any equity in the car to lower payments.

You can also refinance for a longer term, stretching the loan out further to lower payments.Both are viable reasons to refinance a loan if the situation requires.

Lower interest rates: Refinancing an auto loan to get a lower interest rate is also a common motivator for change. As long as the drop in rate is significant enough to make it worthwhile, it’s another viable reason.

If market rates drop enough so new loans are cheaper than your existing loan, that could be worth doing. If you have improved your credit score and have a bad credit car loan and could now qualify for a standard loan at a much lower rate, that’s another good reason to refinance.

Change the terms of your loan: Refinancing to change the terms of the loan is a common way to remove a cosigner, co-borrower or any other restrictions a loan may have. This is less common but still a good reason to consider refinancing.

You can refinance an auto loan to remove a cosigner if your credit score has improved enough to qualify on your own.

You can refinance to remove a co-borrower for the same reasons. For example, if you have split from a partner and have agreed you get the car, you can refinance to remove their name from the loan and switch the title to you.

These reasons aren’t as common as lowering payments or getting a lower rate but they are just as feasible!

Refinancing a Car Loan in Canada

The refinancing process is simple. It’s almost identical to getting a new loan but involves using the settlement figure from your old loan instead of the value of the new car. Check your credit score, get a down payment together if you’re using one, contact your current lender to tell them what’s going on and to get a settlement figure, qualify for the new loan and apply for it.

Once agreed, your new lender will pay off your old one and you’ll switch your payments over to the new loan. It’s that easy!

Refinancing isn’t for everyone or every situation, but it can work for most people. If you need help deciding if it’s right for you, contact one of our team.

If you're ready for a car loan in Southern Ontario, we'd love to help with that! simply fill in the form below to get started.