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Refinancing a Car Loan in Canada

Refinancing a Car Loan in Canada

If you currently have an auto loan, refinancing it to a lower interest rate can help you save money over the lifetime of the loan. With interest rates in Canada at historic lows, now may be the perfect time to refinance and reduce your monthly payments.

Refinancing your car loan means taking out a new loan to pay off your existing one. By securing a lower interest rate, you can potentially lower your monthly payments and total interest costs. However, refinancing also involves fees and closing costs, so you need to run the numbers to see if it makes financial sense for your situation.

This comprehensive guide will walk you through everything you need to know before refinancing your car loan in Canada. We’ll cover current interest rates, costs and risks, qualification tips, the step-by-step process, and alternatives to refinancing. By the end, you’ll understand if and how refinancing could help you save money over the life of your auto loan.

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Lower Interest Rates Mean Lower Payments

Current interest rates on auto loans from major lenders in Canada range from about 3% to 8%, depending on your credit score, loan term, and other factors. The Bank of Canada’s overnight rate sits at just 1%, so lenders can offer very low rates right now.

For example, borrowers with excellent credit scores above 720 may qualify for rates as low as 3% at some lenders. Average rates for used car loans run around 5-7% currently. Subprime borrowers with lower credit scores often pay the highest rates, with some lenders charging up to 8% or more.

Compare your existing car loan interest rate to current market rates. If you could lower your rate by even just 1-2%, you may save hundreds or thousands of dollars over the life of the loan by refinancing.

Use an auto loan refinance calculator to estimate your potential savings. Input your current balance, remaining loan term, and existing rate. Then input your estimated new rate after refinancing. See if the savings justify taking on a new loan.

The lower your new interest rate, the more you will reduce your monthly payment or total interest paid. Even a small rate drop can make refinancing worthwhile if you plan to keep the vehicle for several more years.


When Refinancing Your Car Loan Makes Sense

Refinancing your car loan can make good financial sense under certain circumstances. Here are some of the key situations where refinancing tends to be advantageous:


  • You have strong credit – Having a good or excellent credit score in the 700+ range will help you qualify for the best refinance rates. This ensures you maximize your potential savings.
  • Interest rates have dropped significantly since you originated your loan – If rates are now at least 2 percentage points lower than your current rate, refinancing could lead to substantial interest savings.
  • You plan to keep the car for several more years – Refinancing costs money upfront. So you’ll want to keep the car long enough to recoup those costs through lower monthly payments.
  • You can lower your rate without extending loan term – Try to refinance into a shorter loan term if possible, as this saves the most in interest paid.


In essence, refinancing makes the most sense when you can secure a meaningfully lower interest rate without increasing your loan length. This allows you to pay off the car faster and save money over the life of the loan.


Hidden Costs to Factor In

While refinancing your car loan can lead to significant interest savings over time, the process also comes with some hidden costs you’ll want to factor into your decision.


Prepayment Penalties

If your existing auto loan has a prepayment penalty clause, you may face fees for paying off the loan early through refinancing. Prepayment penalties are most common in the first 12-24 months of a car loan. Be sure to check your original loan agreement to see if you’ll incur any penalties for refinancing your loan.


New Loan Fees

When you refinance with a new lender, you’ll likely have to pay origination fees and other closing costs for that new loan. Closing costs typically range from 1-5% of the total loan amount. You may also face administrative fees. While refinancing still may save you money in interest, don’t forget to account for these new loan fees in your calculations.


Temporary Credit Score Dip

Applying for a refinance loan will require a hard credit check, which could cause a small temporary dip in your credit score. Too many credit checks in a short timeframe can negatively impact your score. However, as long as you continue making on-time payments, this impact should be minor and short-lived.


Tips for Qualifying for the Best Refinance Rate

Getting approved for the lowest interest rate possible on your auto refinance loan requires advance preparation. Follow these tips to put yourself in the best position to qualify for the most competitive refinance rates:


Have a Down Payment Ready

Lenders view borrowers who make a down payment as less risky. Putting 10-20% down shows you are financially committed to the loan. Even a small down payment can result in better rates. Calculate the down payment based on your car’s current value, not the original purchase price.


Know Your Credit Score and History

Good credit is key for the best refinance rates. Before applying, check your credit score so you know where you stand. Scores above 700 will qualify you for prime rates. Also review your credit reports for errors that could be lowering your score. If your credit needs improvement, wait to apply until you boost your score.


Provide Proof of Stable Income

Lenders want reassurance you can repay the new loan. Have pay stubs, tax returns, and bank statements ready to verify your income. Highlight multiple years at the same employer. Consistent income from your job or business will help you qualify for the lowest rates.


Shop Around with Multiple Lenders

Pre-qualify with several lenders to compare rate offers. Online lenders, banks, credit unions, and auto manufacturers all offer refinancing. Casting a wide net increases your chances of finding the most competitive interest rate and best overall loan terms.


Refinancing Process Step-By-Step

Refinancing your auto loan is a straightforward process that can typically be completed in just a few weeks. Here are the key steps involved:


1. Determine the Payoff Amount on Your Current Loan

First, you’ll want to contact your current lender to get the exact payoff amount on your existing car loan. This is the full amount needed to pay off the loan and close the account. Make sure to get the payoff quote on the same date you plan to refinance, as the balance changes daily with accruing interest.


2. Gather Necessary Paperwork

To refinance, you’ll need to provide documents to verify your identity, income, and other application details. Common paperwork includes a valid driver’s license, recent pay stubs, W-2 tax forms, and proof of insurance.


3. Submit the Refinance Application

Once you have all the required documents, complete a refinance application with your chosen lender. This can often be done entirely online for a quick and easy process. Make sure to compare multiple lender offers to find your best rate.


4. Get Approved for the New Loan

The lender will review your application and verify your information to decide whether to approve you for the refinance. This process may involve a hard credit check, which could temporarily lower your credit score. Expect a decision within 1-2 days.


5. Lender Pays Off Old Loan and Begins New One

Once approved, the lender will pay off your existing auto loan balance and begin your new refinanced loan. Make sure the payoff details are correct before signing. And congrats – you’ve now successfully refinanced your car!


Alternatives to Refinancing

While refinancing your car loan can lead to significant interest savings, it’s not the only option to reduce your auto loan costs. Here are some alternatives to refinancing that may also help you pay less over time or get out of your loan faster:


Ask Your Current Lender About a Rate Reduction

Before jumping into a refinance, contact your existing lender to see if they can simply reduce the interest rate on your current loan. Especially if you’ve been a long-time customer with excellent payment history, the lender may be willing to lower your rate as a customer service gesture. This avoids any refinancing fees or credit checks. Just be sure to get any rate reduction agreed to in writing.


Make Extra Loan Payments

Making an extra principal payment each month is another way to pay off your loan faster and reduce the total amount of interest paid over the life of the loan. Even an extra $50 or $100 per month can make a difference. Be sure to specify the extra amount should go towards the principal. You can make extra payments manually each month or set up automatic payments.


Sell the Vehicle and Buy Another One

If your goal is primarily a lower monthly payment, then selling your current vehicle and using the proceeds as a down payment on another vehicle can be an option. Just beware of dealer financing, which is often at higher interest rates. Get pre-approved financing from your bank or credit union before going to the dealer, so you know the rate you qualify for.

Selling and buying another car avoids refinancing costs but also takes time and effort. Weigh the costs and benefits against simply refinancing your current loan before taking this approach.


Key Takeaways

When considering refinancing your car loan, there are a few key takeaways to keep in mind:

It’s generally recommended to wait 6 months and make on-time payments before refinancing your auto loan. This allows you to rebuild any credit score impact from when you originated the loan. Refinancing too soon may mean you don’t qualify for the best rates.

While refinancing can lower your overall interest costs, it could also raise your monthly payments if you extend your loan term. Carefully consider the tradeoffs of reduced monthly payments versus higher total interest paid over the life of the loan.

Refinancing involves fees including application fees, origination fees, and charges to obtain your credit report. There may also be prepayment penalties if you refinance before your existing auto loan matures. Factor these costs into your decision.

By understanding these key points, you can determine if refinancing makes sense for your situation. Refinancing your car loan can save money but also comes with risks to weigh.



The decision to refinance your car loan should not be taken lightly. Make sure to consider all angles, from your credit score to loan terms to closing costs. While refinancing offers the potential for significant interest savings, it also comes with financial risks.

Approach the refinancing process carefully and compare multiple lender offers to find your best option. Look at all the key factors – your credit score, current interest rate, monthly payments, new interest rates available, and loan terms. Crunching the numbers is essential.

Refinancing can potentially save you thousands of dollars in interest payments over the life of your loan if you secure a substantially lower rate. But extending your loan term to get lower monthly payments also means paying more interest over time.

There are closing costs and fees associated with refinancing that must be factored in as well. And applying for a refinance loan can result in a temporary dip in your credit score.

Overall, if you can get a significantly lower interest rate without extending your loan term, refinancing your car loan can be a smart financial move. But make sure to weigh the pros and cons carefully for your specific situation. Comparing multiple lender offers will help you find the best rate and terms if you decide refinancing makes sense.

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Questions About Refinancing a Car Loan

Refinancing your car loan in Canada can be worth it if you can get a lower interest rate than your current loan. This allows you to save money over the life of the loan by paying less interest. Refinancing also makes sense if your credit score has improved significantly since you took out your original loan, as you may now qualify for better rates. You’ll want to run the numbers to see if the costs of refinancing outweigh the potential interest savings.

Auto refinance rates in Canada currently range from about 3% to 8% depending on the lender, loan term, your credit score, and other factors. Many of the major Canadian banks like RBC, TD, and Scotiabank offer competitive refinance rates. You can also check with credit unions and online lenders. As a benchmark, excellent credit scores over 720 qualify for the lowest rates.

Most lenders in Canada require you to wait at least 6 months into your current auto loan before refinancing. This allows you to establish a solid payment history and avoid early repayment penalties that some loans charge. Waiting 1-2 years is better to maximize interest savings. Your credit score may also improve during that time, qualifying you for even lower rates.

Typical documents needed to refinance your car loan in Canada include:


– Proof of income – Recent pay stubs, T4, tax returns

– Government ID – Driver’s license, passport

– Vehicle ownership – Registration showing no liens

– Existing auto loan details – Account number, balance

– Insurance coverage details

– Odometer reading and vehicle condition

– Down payment amount


Having these documents ready streamlines the application process with lenders when looking to refinance your auto loan.

When you apply to refinance your car loan in Canada, the lender will check your credit, which results in a hard credit inquiry. Too many hard inquiries in a short period can negatively impact your credit score. However, a single inquiry from refinancing is generally not detrimental, especially if you qualify for a lower rate. Also, maintaining good standing on the refinanced loan helps rebuild your score over time.


To calculate potential savings from refinancing your car loan in Canada, first document your current loan details including balance, interest rate, and months remaining on the term. Then, get refinance rate quotes from lenders. Plug your current loan details and new rate into an auto loan refinancing calculator, inputting the same remaining term. The calculator will show your new monthly payment and total interest costs to determine overall potential savings from the refi.

When refinancing your car loan in Canada, there are typically fees including:


– Application fee – $0-$500

– Appraisal fee if required by lender – $150-$350

– Title transfer fee – $15-$60

– Registration costs

– Prepayment penalty on existing loan – Varies


Closing costs range from a few hundred dollars into the low thousands at most lenders. The interest savings usually outweigh the fees over the loan term if you qualify for at least 2% lower rate. Shop around for quotes outlining all fees.

It depends. Extending your loan term when you refinance your car in Canada lowers the monthly payment. But you pay more interest over the life of loan. Typically you can get the best rates on terms under 6 years. Analyze whether the lower monthly payment outweighs extra total interest paid over longer term before choosing. Aim to pay off the loan as fast as comfortably possible.

Some top places to compare for the best car loan refinancing rates in Canada include:


– Your existing lender or bank

– Other major banks – TD, RBC, Scotiabank, CIBC

– Credit unions

– Online lenders like and

– Auto manufacturers’ captive finance arms


Getting multiple quotes allows you to secure the most competitive interest rate and terms to save the most money. Focus on total interest paid over loan term rather than just monthly payments.

Most major banks and lenders in Canada require a minimum credit score between 650-700 to qualify for auto loan refinancing. But scores of 720+ get the very best rates under 5%. Improving your credit score before applying gives you better chance to lower interest rate – and therefore monthly payments – when refinancing your car.

Some Canadian lenders allow you to roll in negative equity from your trade-in vehicle to the refinanced loan amount, but approval depends on your financial qualifications. Expect a higher interest rate – by 1-3% typically – compared to a straight refinance. Limit negative equity to stay under 125% of the new car value to qualify with most lenders.

You typically do not need to use a broker to refinance your car loan in Canada. Since auto loans have much shorter terms and smaller balances than mortgages, you can easily compare rates directly from major banks and online lenders. If you have especially complex financial situation, a broker may be able to tailor solutions from niche lenders. But for most situations, avoid the broker fee and get quotes yourself.


Yes, many lenders in Canada allow you to pre-qualify or get pre-approved for auto loan refinancing. This involves submitting some basic personal and financial details for an initial eligibility assessment. If pre-approved, you will get a rate and loan amount offer which locks for 30-90 days typically. This gives you time to shop for cars with confidence about your budget.

Refinancing your car loan in Canada with a home equity line of credit or HELOC allows you to tap available equity in your home at lower rates. But HELOCs have variable rates, while most auto loans lock fixed rates. This exposes you to the risk of rising interest costs over time. Also, if you default, you put your home at risk which is not the case with typical car loans.

If you have bad credit below 650, finding lenders willing to refinance your car loan in Canada is tricky but options exist. Some places to look into include:


– Subprime lenders like CARite Canada and Rifco National Auto Finance

– Credit unions like Vancity or Prospera Credit Union

– Lenders specializing in bankruptcy like Refresh Financial

– Co-signing with better qualified applicant


Expect higher interest rates around 10-15% with bad credit. Building your score before applying will yield better offers.

Personal loans and lines of credit sometimes offer lower interest rates than auto refinancing. But auto loans can get you preferable rates lasting the exact loan term needed, while LOC limits can change. Defaulting on a LOC also risks other assets as collateral. Auto loans have clear vehicle collateral. Get quotes for both options, but fixed-rate auto loan refinancing often works out best over the long run.

If you refinance your car in Canada and use it at least 50% for self-employed business purposes, the CRA allows deducting a portion of your auto loan’s interest on your taxes as a business expense. Keep a mileage log indicating personal vs. business use. You can deduct half the loan interest if you use the car 50% of the time for business. The deduction percentage scales accordingly.

The most effective ways to secure the lowest interest rate when refinancing your auto loan in Canada include:


– Boosting your credit score over 720

– Choosing shorter loan terms under 6 years

– Providing 20-30% down payment

– Having stable income and good debt-to-income ratio

– Checking rates from at least 3 top lenders

– Having multiple accounts in good standing


Implementing some of these strategies could help you save 1-3% on interest rates compared to just accepting what the lender initially offers.


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