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Car Loan Cash Back Explained

Car Loan Cash Back Explained

Canadian drivers are feeling the pinch from rising auto loan payments. With interest rates climbing and loan terms getting longer, many are struggling under the weight of high monthly bills for their vehicles. But you may have options to get some relief. Refinancing your auto loan can potentially lower your interest rate and monthly payment. And some lenders are now offering an extra incentive – cash back when you refinance.


In this comprehensive guide, we’ll explain everything you need to know about cash back car loan refinancing in Canada. You’ll learn how it works, the key benefits and risks, how to maximize your cash back amount, top lenders offering deals, and step-by-step instructions for the process. Read on to see if cash back refinancing could help provide funds to pay down debt or cover expenses.


Here’s what we’ll cover:

 

  • What is Cash Back Car Loan Refinancing?
  • How the Cash Back Incentive Works
  • Benefits and Risks to Understand
  • Tips for Maximizing Your Cash Back
  • Top Lenders Offering Deals
  • Refinancing Step-by-Step
  • Qualifications and Documentation
  • Alternatives to Consider
  • Key Closing Tips
  • The Bottom Line

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What is Cash Back Car Loan Refinancing?

Cash back car loan refinancing allows borrowers to lower their interest rate and monthly payments while also receiving a cash payout. With a traditional auto loan refinance, the new lender pays off your existing car loan balance and you begin making payments on the new loan. But with a cash back refinance, the new loan amount is actually higher than your current payoff balance.

The difference between your old loan balance and the new higher loan amount is paid out to you in cash. For example, if you owe $15,000 on your current auto loan and refinance for $17,000, the $2,000 difference is sent to you as a cash rebate. Essentially, cash back refinancing lets you tap into your car’s equity to unlock funds now while also potentially lowering your ongoing payments.

Cash back refinancing differs from standard refinancing in two key ways:

 

  • You receive cash: Standard refinancing just rolls your old balance into a new loan. Cash back puts money in your pocket.
  • Loan amount increases: With regular refinancing, your new loan equals your old payoff amount. Cash back loans are larger to provide you the payout.

 

By turning your car’s equity into usable cash, borrowers gain flexibility in using the funds for other financial needs. But it does result in higher overall debt and interest costs over the life of the loan.

 

How Does the Cash Back Work?

When you refinance your auto loan, the new lender essentially pays off your existing loan balance to your old lender. This settles that debt. However, with a cash back refinance, the new loan amount will actually be slightly higher than your remaining balance.

The difference between your old loan payoff amount and the new, higher loan amount is the cash you receive back. Here’s an example to illustrate:

 

  • Remaining balance on your current auto loan: $15,000
  • New refinanced loan amount from lender: $17,000
  • Cash back you receive: $2,000 ($17,000 – $15,000)

 

So in this scenario, the new lender pays off your $15,000 remaining loan balance and provides you an extra $2,000 cash out. This cash can then be used for other financial goals.

The cash back incentivizes you to refinance with that lender, while also giving you funds upfront. Just keep in mind that cash back refinancing does mean you are taking on a larger loan amount and higher total interest charges over the life of the new loan.

 

Benefits of Cash Back Car Loan Refinancing

There are a few key benefits to getting a cash back refinance:

 

Lower interest rate saves money each month – The main reason to refinance is to lower your interest rate. Even a small reduction of 0.5% or 1% on your rate can add up to meaningful interest savings over the life of your loan. This gives you more money to put towards other goals each month.

Cash payout gives you extra funds immediately – Unlike waiting for interest savings over time, the cash back amount is money you get right away when your loan closes. This can provide a nice lump sum to use for important expenses or financial priorities.

Opportunity to pay down other debt or save – The influx of cash from your lender gives you some flexibility on how to use it. Many choose to pay down higher interest credit cards or loans to save money long-term. The cash back is also useful for building up emergency savings or other funds.

Lengthened loan term drops monthly payments – To maximize your cash back refund, you’ll likely need to take a longer auto loan term such as 72-84 months. While this increases your total interest paid over the life of the loan, it does result in a lower monthly payment.

 

Maximizing Your Cash Back Refinance

Follow these tips to get the most cash back possible when refinancing your auto loan:

 

  • Shop around for best cash back offers – Don’t just go with the first lender you find. Spend time researching and comparing the top lenders to find which ones offer the highest cash back incentives. Some lenders may offer 1-2% cash back while others could go up to 5% or more. Shopping around can result in thousands more in cash back.
  • Refinance for a longer term to increase loan amount – Opting for a longer loan term like 72-84 months instead of 60 months allows you to qualify for a higher loan amount and maximize your cash back. Just be aware this comes at the cost of more interest paid over the entire loan.
  • Make sure your car has equity to qualify for more cash – Lenders want to ensure your vehicle is worth more than the loan amount. Having 20% or more equity in your car gives you access to larger cash back refinancing offers.
  • Look for lenders offering 1%+ cash back incentives – While any cash back is nice, ideally you want to find refinancing lenders that offer 1% or higher cash back on the total loan amount. This can give you $1,000+ extra instead of just a few hundred dollars.

 

Risks to Understand

While cash back refinancing can seem enticing, there are some notable risks to be aware of:

 

Higher Loan Amount – When you refinance your auto loan to get cash back, you are taking out a larger loan amount than your existing balance. This means you will be paying interest on a bigger principal over the life of the loan. So even if your rate is lower, you may end up paying more total interest.

More Months of Payments – Most cash back refinances come with extended loan terms. You may add 12-24 months to your original term in order to keep monthly payments affordable on the higher loan amount. This equates to making payments for a longer period of time.

Small Decrease in Monthly Payment – Don’t assume your payment will go down much, if at all. The cash back incentive may be largely offset by the higher principal and longer term. Do the math carefully.

Risk of Being Upside Down – If you refinance for more than your vehicle’s value and then need to sell, you could owe more than it’s worth. This is called being “upside down” or “underwater” on your loan. Be conservative with loan amounts.

 

Overall, make sure to weigh the risks against potential rewards. A cash back refinance can be beneficial but also poses hazards if not used prudently.

 

Ideal Uses for Cash Back Funds

When you receive a lump sum of cash back from refinancing your auto loan, it can be tempting to splurge on wants rather than needs. However, smart consumers will take advantage of this windfall to strengthen their overall financial position.

Here are some of the best ways to put your cash-out car refinance money to work:

 

Pay Down High-Interest Debt

Using your cash to pay off credit cards, personal loans, or other debts charging double-digit interest is one of the wisest moves. This can rapidly accelerate eliminating balances owed and saving money on interest payments.

 

Build Up Emergency Savings

Having a rainy day fund on hand for unexpected expenses provides security and preparedness. Add your cash-out funds to bolster your emergency account balance to cover at least 3-6 months of living costs.

 

Cover Car Repairs and Expenses

Rather than taking on more debt later, you can use the cash back to pay for upcoming car maintenance, repairs, insurance deductibles, or registration fees.

 

Avoid Temptation to Splurge

It can be tempting to use the incoming cash on impulse purchases, vacations, or luxury items. But avoid squandering this money frivolously. Using it prudently on the items above will improve your long-term financial picture.

 

Top Cash Back Refinance Lenders in Canada

When it comes to finding the best cash back refinance offers, these lenders consistently have some of the most competitive rates and incentives in Canada:

 

TD Auto Finance

TD offers cash back refinancing up to $1,500 depending on your loan amount. Interest rates start as low as 3.99% for terms up to 84 months. TD has a quick and easy online application process with no processing fees.

 

Scotiabank

Scotiabank provides cash back incentives up to $750 for refinancing your existing auto loan with them. Their interest rates are competitive, starting at 4.99% fixed for up to 72 month terms.

 

RBC Royal Bank

RBC Royal Bank offers cash back refinancing bonuses typically up to $500. Their interest rates range from 3.99% to 5.99% fixed for terms between 24-84 months. RBC also has flexible loan options for new and used vehicles.

 

CIBC

CIBC offers cash back refinancing incentives up to $1,000 for qualifying customers. Their interest rates start as low as 3.99% fixed for terms up to 84 months. CIBC has an easy online application process.

 

BMO Bank of Montreal

BMO offers cash back refinancing bonuses up to $750 for new customers. Their interest rates range from 3.99% to 5.99% for terms of 24-84 months. BMO has competitive rates and flexible loan options.

 

Refinancing Process Step-by-Step

Once you’ve decided to pursue a cash back auto loan refinance, follow these key steps to complete the process successfully:

 

Research lenders and offers – Your first step should be thoroughly researching and comparing different lenders’ refinance offers. Look for the best cash back incentives along with low interest rates. Online lender marketplaces like RateHub and LoansCanada can help you easily find and compare multiple options.

Check eligibility based on credit, income, car equity – Before applying, use online tools to verify you meet each lender’s eligibility criteria in terms of credit score, debt-to-income ratio, employment history and car loan-to-value ratio. This will help avoid wasted applications.

Apply and provide required documents – Once you’ve selected a lender, complete their application and provide all required documents such as proof of income, driver’s license, car ownership and insurance. Be thorough to ensure quick processing.

Get approved and finalize details – If approved, you’ll receive loan terms including the interest rate, cash back amount, monthly payment and more. Review all details carefully before signing the agreement.

Lender pays off old loan and provides cash – Finally, the lender will pay off your old car loan balance and deposit the extra cash back funds into your specified account. Make sure you continue making payments on your old loan until it shows paid in full.

 

Following this straightforward process will help ensure you get the maximum savings and cash back from your auto loan refinance.

 

Qualification Criteria

To qualify for a cash back auto loan refinance, there are a few key criteria lenders will evaluate:

 

Credit Score Requirements

Most lenders will require a minimum credit score between 650-700 to qualify for a cash back refinance. The higher your score, the better the terms and interest rate you can qualify for. Lenders view borrowers with excellent credit to be lower risk, so they offer the most incentives.

 

Income Thresholds

Lenders want to see stable income that covers your living expenses plus the new loan payment. Having a debt-to-income ratio below 40% improves your chances of approval. Provide recent pay stubs, tax returns, or proof of assets to verify income.

 

Loan-to-Value Ratios

Your loan amount compared to the car’s value is called the LTV ratio. Most lenders cap this at 110-125% for a cash back refinance. Having equity in your car allows you to qualify for more cash back. Trade-ins or making a down payment can help improve your LTV.

 

Other Eligibility Factors

To qualify, you’ll also need to meet requirements like:

 

  • Being the registered owner of the financed vehicle
  • Having an existing auto loan not held by the refinance lender
  • Having made 12+ consecutive monthly payments on your current loan
  • Meeting the lender’s minimum and maximum loan amounts

 

Meeting all the lender’s requirements is key to getting approved for the cash back refinance.

 

Documentation Needed

When applying for a cash back auto loan refinance, you’ll need to provide documentation to verify your identity, income, existing loan details, and more. Here are the key documents lenders will request:

 

Proof of income – Pay stubs, bank statements, tax returns, or other documentation to confirm your income level. Lenders want to see you have enough steady income to afford the new loan payments.

Proof of auto insurance – You’ll need current proof of insurance in your name for the vehicle. Minimum required coverage varies by lender.

Vehicle information – Registration, title, VIN number, and mileage will be required to identify the exact vehicle. Photos may also be requested.

ID documents – Items like driver’s license, SIN card, passport or birth certificate to verify your identity.

Existing loan details – Bring your current loan agreement, monthly statements, payoff amount, account numbers, and lender info. This allows the new lender to pay off your existing loan.

 

Gather these documents before starting the application to make the approval process faster. The lender may ask for additional paperwork depending on your specific situation.

 

Alternatives to Cash Back Refinancing

While cash back refinancing can seem appealing, it’s not the only option for saving money on your auto loan. Here are some alternatives to consider:

 

Traditional Refinancing

With traditional refinancing, you get a new loan to pay off your existing car loan balance, typically at a lower interest rate. This lowers your monthly payments without adding any extra principal. Traditional refinancing may make sense if your goal is solely to reduce monthly costs.

 

Debt Consolidation Loan

You may be able to roll your car loan into a debt consolidation loan that covers other high-interest debts as well. This can simplify payments with one lower monthly payment. Just be sure the interest rate reduction makes it worthwhile.

 

Personal Lines of Credit

Tapping into available funds on a lower-interest line of credit is another option. You can withdraw money to pay off the car loan, then make payments on the line of credit. This strategy works best if you can pay off the balance quickly.

 

RRSP Loan

Some RRSP plans allow you to borrow against your own retirement savings. The interest goes back into your account rather than to a lender. While not ideal, it’s a lower-cost way to pay off the car loan if you repay the RRSP loan quickly.

Explore all options to find the most strategic debt payoff plan. Cash back refinancing has advantages but also risks to weigh carefully.

 

Closing Tips for Maximizing Savings

When going through the cash back auto loan refinancing process, keep these closing tips in mind to maximize your savings:

 

Shop Multiple Lenders

Don’t just go with the first lender you find offering cash back refinancing. Take the time to get quotes from at least 3-5 lenders so you can compare interest rates and cash back offers. Even a small rate difference can save you hundreds over the loan term.

 

Choose Longest Term That Fits Budget

Opting for a longer loan term results in lower monthly payments, allowing you to qualify for the maximum cash back amount. Just make sure the monthly payment still fits comfortably in your budget.

 

Consider Slightly Used Cars

Interest rates are typically lower when financing used vs. new vehicles. Even choosing a 1-2 year old used model can open up cheaper financing options. This maximizes how much cash back you can get.

 

Make Extra Payments When Possible

While a longer term gets you more cash back upfront, you’ll pay more interest over the full loan length. Making extra principal payments when possible lets you have the best of both worlds.

 

The Bottom Line

When considering a cash back auto loan refinance, it’s important to weigh the pros and cons to determine if it’s the right option for your situation.

On the pro side, cash back refinancing can provide funds upfront to pay off other debts or cover expenses. You may also benefit from a lower interest rate and monthly payment. Having extra cash in hand or lowering payments can offer financial flexibility.

However, there are some cons to be aware of. With a larger loan amount, you’ll pay more interest over the full loan term. Your loan will be extended, meaning you have more months of payments. Monthly payments may not go down much after receiving the cash back upfront. There’s also risk of being upside down on the loan.

Overall, cash back refinancing can be a smart move if used wisely. But make sure you carefully consider the costs over the long run. Run the numbers to determine if the cash incentive makes sense for your situation. Compare all lenders and loan terms before making a decision.

The cash back refinancing option won’t be right for everyone. But for some borrowers, it can provide a nice cash boost when used strategically. Understand the risks and benefits to decide if cash back auto loan refinancing aligns with your financial goals.

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Questions About Car Loans & Cash Back

Cash back on a car loan in Canada refers to getting money back when you finance or refinance an auto loan. It’s an incentive offered by some lenders to encourage borrowers to finance with them. You can get cash back when taking out a new car loan or refinancing an existing auto loan. The amount of cash back can range from a few hundred to a couple thousand dollars depending on the lender and loan terms.



The cash back on a car loan works by the lender depositing the cash amount directly into your bank account after the loan has been finalized. For example, if you qualify for a $1,500 cash back offer when financing a $30,000 vehicle, the lender would deposit $1,500 into your account after funding the $30,000 loan. The cash is meant to help lower the overall cost of the loan.

Yes, most lenders in Canada allow you to use the cash back amount toward paying down the principal balance of the auto loan. This can help reduce the total interest you pay over the life of the loan. Some lenders may require you to make a certain number of payments first before applying cash back to the principal. Check with your specific lender about their cash back use policy.

The main requirements to qualify for cash back on a car loan in Canada are:

 

– Good credit score, usually 680+

– Large enough loan amount, often $15,000+

– Financing a new or used vehicle from a dealership

– Taking out a loan term of at least 24 months

– Meeting the lender’s income requirements

 

Meeting these requirements makes you eligible for cash back offers from most lenders when financing or refinancing.

Yes, many lenders offer cash back incentives when you refinance an existing car loan. The same qualification criteria would apply as when taking out a new loan. Refinancing allows you to potentially lower your interest rate and monthly payment while also taking advantage of a cash back offer from $100 up to over $1,000 in some cases. Shop refinance rates to find the best cash back deal.

The maximum cash back available ranges quite a bit among lenders in Canada, but offers typically top out around $2,000-$3,000. To qualify for the upper limit cash back offers, you’ll need an excellent credit score, high income level, loan amount over $60k, and potentially financing a luxury vehicle brand. Average cash back offers fall more in the $300 to $1,500 range from most lenders.

In most cases no, accepting a cash back offer does not increase the interest rate on the car loan. The cash back is built into the lender’s financing offer as an added incentive for you. However, it’s wise to compare rates and do the math on offers with and without cash back to determine the best overall value for your situation.

Absolutely. Cash back offers can be a very effective negotiation tool when shopping lenders for the best auto financing rate and terms. Letting another lender know you have been approved for a loan with $1,000 cash back for example may induce them to make a better counter offer to win your business. Use cash back competitively without accepting any offer right away.

The CRA does not treat cash back received on an auto loan as taxable income. This differs from certain purchase incentives on vehicles which do sometimes need to be claimed. Because the cash back is provided by the lending institution as part of financing, it is not subject to being taxed. Just ensure the amount is properly documented by the lender for your records.

You can only use lender cash back offers when financing a vehicle at a dealership that has a lending relationship with that institution. For example, if Scotiabank is providing a $750 cash back incentive, you must finance at a Scotiabank dealership for it to apply. Dealers have partnerships with certain banks and credit unions to provide financing.



No, an auto loan cash back offer should not be confused with a manufacturer rebate or incentive. Those come directly from the car company to help sell certain models. Cash back is only available when financing or refinancing a loan with select lenders. Manufacturer rebates can generally be combined with cash back financing offers.

The time frame to receive cash back can vary between lenders from 4 weeks up to 90 days in some cases. Some banks and credit unions issue the cash as soon as the loan is funded while others make you wait until after 1-3 months of on-time payments. It’s important to confirm when you will receive the cash incentive.

Unfortunately, no. Cash back incentives from lenders are one time use promos tied to new financing or refinancing of an auto loan. If you take the cash back when purchasing one vehicle, you cannot get another cash offer from the same bank or credit union when you buy another car in the future. It is a one-time program.



Yes, many large independent and online auto finance companies do entice borrowers with cash back offers. These non-bank lending institutions need to provide incentives like cash back to compete with big banks and credit unions. They often approve applicants that traditional lenders turn down too.

Cash back allowances do not apply to auto leases the same way as financing purchases. However, some leasing companies do provide lease cash which can lower the drive-off and payments. And manufacturer rebates can reduce the lease cost. Discuss available lease incentives with the dealer when negotiating.

What happens depends on if you still owe money on the financed vehicle or not. If the loan has been fully paid off when you trade it in, you do not have to worry about repaying cash back. However, if you still owe money, the remaining cash back balance gets tacked onto the end of your new loan.

Yes, cash back offers from lenders can generally be used when financing both new and used vehicles. The vehicle just needs to meet the lender’s eligibility requirements which typically include: fairly recent model year, under a certain mileage threshold, and minimum value amount. Check on used vehicle criteria for any cash back promotion.

Sometimes dealerships will run their own cash back promotions as an add-on to manufacturer incentives to help drive sales. These are less common than lender offers but can provide an extra $500 or so in savings directly from the dealer. They may apply only to certain models already on the lot that the dealer wants to move quickly.

Typically no, the cash back money is yours to keep permanently as soon as the lender deposits it into your account. The only exception would be if you cancelled the loan within the “right to rescind” period which makes the deal void. As long as you uphold the financing contract, the cash back remains yours no matter what.

Follow these tips to maximize your cash back savings:

 

– Check your credit and improve your score if needed

– Compare different lender offers and shop interest rates

– Negotiate the cash back incentive if too low

– Look for cash back promotions stacked with other savings

– Refinance your current loan to get new customer deals

– Read all fine print details on the cash back terms

– Meet all requirements to qualify for top offers

– Use manufacturer rebates combined with lending cash back

– Time financing with peak holiday promotional periods

 

Following these guidelines will help ensure you get the most cash back possible from your next auto loan!

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