Car Loan Refinancing in Canada: All The Information You Need

Car Loan Refinancing in Canada: All The Information You Need

Posted on April 7, 2023

It's a popular choice to refinance a car loan for lots of reasons. Different people in different situations will find themselves refinancing for a multitude of motives but there are three main ones we see most often.

Our  car loan team outlines each of the three main reasons to refinance a car loan and how it can benefit you in certain situations.

Pros of Car Loan Refinancing in Canada

Lower monthly payments (with lower interest rates): This is the most common reason to refinance a car loan. Whether you borrow less, take advantage of lower rates, extend the loan term or something else, refinancing to lower the monthly loan payment is probably the #1 reason people refinance.

If you’re in a position to refinance for a lower amount, your payments will reduce accordingly. If interest rates have dropped, you can also make savings. If you extend the loan term, you will lower your monthly payments but likely increase the overall cost of borrowing. It’s still useful though.

Consolidate other debt: This is another common reason to refinance a car loan. To roll all debts into one loan and a single monthly payment. For example, say you owed credit cards, a personal loan and perhaps a payday loan as well as your car loan. As long as you had enough equity in your car and sufficient credit score to qualify for the loan, you could pay off all that other expensive debt for a single debt.

This works as long as you can pay everything else off, or the majority of your other debt. While you can make modest savings part paying off other debt, refinancing works best when you can wipe the slate clean.

Make use of your increased credit score:  Another common reason to refinance an auto loan is when your credit score increases enough that you’ll get a much better value loan. For example, you currently have a bad credit auto loan with a competitive but high interest rate. You have improved your credit score over the past year so you’re now in ‘good’ territory and could qualify for a standard car loan at a much lower rate.

In the vast majority of circumstances, this could save you a lot per month and perhaps thousands of dollars in interest over the loan term. We often recommend this route to clients who come to us for a bad credit car loan, improve their situation and want to access cheaper borrowing.

There are of course, many more reasons for refinancing a car loan and they will all make sense to people in different situations. As long as it makes sense for you and you can afford the changes, refinancing is fast and simple!

Cons of Car Loan Refinancing in Canada

Potentially more expensive in the long term: Car loan refinancing is not all good news though. It could make the overall cost of the loan more expensive. If you extended your loan to lower the monthly payments as outlined above, the monthly cost may reduce but the overall cost may become more expensive. Interest is calculated over the term so if you extend the term, the overall amount of interest you pay will increase.

Older cars attract higher interest rates: While you may have a great credit score and can easily afford the loan, if your car is getting on a bit, you may not see the lower interest rates you expect. Many lenders will charge a higher interest rate for older cars.

If you bought a used car with your loan, you may find the new interest rate could be the same or even slightly higher on any new car loan proposal. That seems counterintuitive but could be down to the age of the car.

A new car loan might just be cheaper: Refinancing is definitely a viable way to raise or save money but it isn’t the only way. It may be better to settle your current car loan with a new loan altogether. Your new loan could have a lower rate, a shorter term or offer other incentives. Either way, it could be cheaper to service than your current loan and should definitely be taken into account before you commit.

Whatever you decide to do, car loan refinancing is definitely an option if you need to change things up. It isn’t your only option though so make sure you check everything that’s available before your commit!

Contact Unique Chrysler for help, advice and competitive car finance and leasing.