When Auto Refinancing Makes Sense

As we come out of one of the longest low-interest points in our history, the question of when to refinance an auto loan is good. We are still seeing low-interest record rates, and with inflation on the rise, many Canadians are looking at options to lower their monthly bills. So, we thought it was time to take a deep dive and look at when auto loan refinancing makes sense and when it is best to wait.

How auto refinancing works in Canada

Car refinancing is a process in which you essentially buy your vehicle all over again. The process is a little cleaner than the purchasing, as you do not have to haggle over the price! Think of it this way: as you own the vehicle, the car loan balance is the purchase price.

When you go to refinance, you will get qualified by the lender that you are looking to use. Part of that process includes checking if you can refinance and if the vehicle is eligible for refinancing. If everything looks good, the lender will issue a new financing contract for the amount left on the car and then pay out your current loan. It is usually a fast process and can save you a fair bit of money over the loan term when done at the right time.

Who should refinance a car?

Refinancing a car is yet another financial tool that you can use to lower your debt and pay less money monthly. It is a tool that anyone should be aware of and use when it benefits them. It is a little bit of work, but it can save you thousands of dollars in the long term, like refinancing your mortgage. Plus, cars are a depreciating asset, so the better term and interest rate you can secure, the less money you put into an investment that loses money with every km driven.

When should you refinance your car?

Anytime you are considering refinancing, you always remember that the goal is to save you money in the long run. So, here are a few scenarios in which refinancing a car makes sense.

  • Interest rates drop

During the pandemic, auto refinancing was at an all-time high, and interest rates were crazy low for a good reason. Interest rates, especially on larger loans, will impact you over the long term. Let’s do the math. Let’s assume that you have a loan of 25,000 for 60 months. At a 7 per cent interest rate, you will be paying roughly $495.03 per month and pay a total of $4,701.80 of interest over the term of the loan. While if you take the same loan but at a 5 per cent interest, you are paying $471.78 and $3,306.85 over the lifetime of the loan. Simply refinancing to the lower 5 per cent interest rate saves you $1,395 over five years.

  • Your financial situation has improved

Lenders use a debt-to-income ratio calculation and your credit score to calculate your rate. If you have paid down debt, increased your overall monthly income or improved your credit score, you may be able to get a better rate or more favourable terms by refinancing.

  • You were not happy with the first offer

Depending on when you bought your vehicle, you might not have gotten the best deal. Whether it was the interest rates were high, or your financial situation was not great, whatever the reason, refinancing can be a great way to get a better deal. This is especially true if you financed directly from the dealer, as in some cases, the dealer will add some percentage points to make a profit.

  • Trouble keeping up with bills

If you are struggling to make ends meet, it might be a great time to look at refinancing your car payment. A refinance could allow you to lower your monthly payment, or if you are looking for something a little more cost-cutting, you can even look at extending the term of your loan. However, if you do not have to extend your term, it is usually a good thing to try to avoid. As a longer-term means, you will pay more interest over the term.

When should you not refinance your auto loan?

There are also times when refinancing your auto loan makes no sense. Here are a few of them.

  • Your loan is mostly paid off

If your loan is close to being paid off, there is no real benefit to refinancing your auto loan. Interest is often front-loaded, so the longer you wait to refinance, the less benefit in terms of interest saved. In most cases, if a loan has less than a year, it is typically better to ride out the term and pay off the car without refinancing.

  • If your car is old or has a lot of KMs on it

Cars are one of the greatest depreciating assets, and as you use your vehicle, its value starts to drop significantly. Some lenders have a red line in terms of refinancing, and that red line is generally around the age of the vehicle or the kilometres on the car. For instance, some major lenders will not refinance a more than a seven-year-old car or a car with more than 100,000 km on the engine.

  • The fees are not worth it

Naturally, every loan has its fine print, and refinancing does have a cost to it. Some auto loans have prepayment penalties that require you to pay an additional penalty or additional interest in addition to the principal to get out of the loan. In comparison, other loans have precomputed interest and require you to pay off the entire interest owed before they will allow you to pay off the loan. In addition, the refinancing lender will also have some fees, such as a lienholder and provincial re-registration fees. So, it is always best to see how much you will save by refinancing and then compare it to the cost to refinance. If the cost outweighs the benefit, it might not be time to refinance.

  • You need to apply for more credit

If you are looking to buy a home, the first thing that a lender will ask is if you have just purchased a car. Refinancing an auto loan is the same thing, and as auto lenders will do a hard check on your credit, it will negatively impact you for a short period. This is why if you are looking to secure a mortgage or go for that AMEX Platinum card, you might want to hold off on refinancing until you are approved for the larger credit check.

  • Documentation of your need to refinance your car

When it is time to chat to a lender to refinance your auto loan, they will have a long list of specific documents they will want to see. Each lender and case is slightly different, so we cannot precisely say what they will want from you. However, in general, they will want to see at least the following:

  • Banking information or a void cheque for the pre-authorized payment agreement between you and the lender
  • Vehicle information including the year, make, model, trim, current km, and the vehicle’s title
  • Photo identification can be a driver’s licence, a photo ID card or a passport
  • Current pay stub, T4 or relevant tax return information

Frequently asked questions about auto refinancing

When is the best time to refinance your auto loan?

There is no one best time to refinance your vehicle. It will depend on various things, and each person and situation is a little different. In general, it is good to look at refinancing when you still have some term left on the loan; the current interest rates are lower than when you signed the loan agreement and if you are in a better financial situation than when you agreed to the loan. If that sounds like you, it might be a great time to contact a lender and see the costs of refinancing your auto loan.

Can I get cashback when I refinance?

Yes, but it will depend on the lender. Most lenders provide a cashback option but make sure you get better terms or see a lower rate on your new car loan before signing the dotted line.

What do I need to refinance my car loan?

It will all depend on the lender. However, in general, you should expect to have to provide the following to a lender:

  • A home address with a property tax bill, rental agreement or bill 
  • Source of income that you can prove via tax documents or a pay stub
  • A government-issued photo ID to prove who you are

In addition to the documentation, you will also need to showcase the following:

  • A debt-to-service ratio a lender will approve; the lower the ratio, the better
  • A good credit score and established credit history

Which lenders are the best for refinancing?

This will also depend on the specific situation and your vehicle. However, some of the top refinancing options include the big five banks such as BMO, CIBC, RBC, Scotia and TD Bank. Several online lenders provide highly competitive rates that often beat the traditional banks, including AutoMaxx, ApprovalGenie and DriveTime Motors.

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Scott Nordlund

Originally from the West Coast, Scott is an avid writer & personal finance specialist now living in Ottawa. He has written for Moneywise, several fortune 500 companies and a host of Canadian personal finance sites. He holds a MA in Political Science from Carleton University and is the owner of Canadian Content Factory.