Refinance a car loan: 8 steps to get better rates & terms

Refinancing a car loan can save you money, lower your monthly payments, or help you secure better terms. Whether rates have dropped or your financial situation has changed, refinancing could be the key to better managing your car loan.

Can you refinance your car loan?

Yes, you can refinance your car loan in Canada. Refinancing involves replacing your existing auto loan with a new one, potentially offering better interest rates or more favourable terms. This process can be beneficial if your credit score has improved, interest rates have decreased, or your financial situation has changed since you first obtained the loan.

However, it’s important to consider factors such as prepayment penalties on your current loan and any fees associated with the new loan. Additionally, lenders may have specific criteria for refinancing, including the age and condition of the vehicle.

8 steps to refinance a car loan in Canada

Step 1: Review your current car loan

Start by gathering all the details of your existing loan, and review the following information:

• Monthly payment
• Interest rate
• Remaining balance
• Payoff amount
• Loan term
• Prepayment penalties

While you’re reviewing your loan documents, weigh any fees you’ll be charged for paying off your loan early against potential savings from refinancing an auto loan to make sure it’s worth it. Car loans are usually open in Canada, which means there are no prepayment fees, but it’s best to review your contract first.

Step 2: Check the value of your car

Your car’s current value plays a significant role in refinancing eligibility. Use tools like the Canadian Black Book or Autotrader.ca to estimate your vehicle’s worth, considering its make, model, mileage, condition, and location. If your car’s value is less than what you owe, refinancing may not be beneficial, and selling the car privately or trading it in could be better alternatives. You can also learn more from our guide on how to estimate the value of your car.

Step 3: Check your credit score and eligibility

Your credit score and debt-to-income (DTI) ratio impact your refinancing options. Use free tools like Borrowell or Credit Karma to check your credit score. Keep in mind that most lenders require a minimum loan amount (often $5,000 or more) and may have restrictions on older vehicles or those with high mileage (e.g., over 10 years old or 150,000 km). Review the lender’s eligibility criteria to ensure you qualify before applying.

Step 4: Compare car loan refinancing options

Shop around to find the best rates and terms. Look at credit unions, online lenders, and traditional banks in Canada. When comparing loans, consider the interest rate, loan term, fees, and how much your monthly payments will change.

Step 5: Apply for pre-approval

Many lenders offer car loan pre-approval, allowing you to see estimated rates and terms without affecting your credit score. Complete the pre-approval application on the lender’s website by providing basic details about yourself, your vehicle and your current loan. This step will help you narrow down the best options without committing to a specific loan yet.

Step 6: Review pre-approval offers

Carefully evaluate the pre-approval offers you receive. Compare them to your existing loan to confirm the savings and assess the new terms. Factor in any perks or potential fees, and double-check that refinancing will actually benefit you in the long run. If the cost savings are minimal or if fees cancel out the advantages, you may want to reconsider.

Step 7: Complete your application

Once you choose a lender, submit a full application. This typically requires more detailed information, such as proof of income, insurance and vehicle information (e.g., VIN, mileage). Review the loan documents carefully, paying close attention to terms, repayment schedules and fees. Sign the agreement only when you’re comfortable with the terms.

Step 8: Pay off your previous loan

Your new lender will either directly pay off your old loan or transfer funds to you to settle it yourself. Contact your original lender to confirm the loan is fully paid off and the account is closed. Keep documentation of the payoff to avoid any disputes or surprises later.

What are the current auto refinance rates?

The average car loan interest rate in Canada is approximately 7.5%.
Refinance rates can vary based on individual financial factors such as credit score, income and debt levels. Borrowers with strong credit profiles may qualify for rates below the national average, while those with lower credit scores might encounter higher rates. Consult with multiple lenders to obtain personalized rate quotes tailored to your financial situation.

When is it a good idea to refinance a car loan?

You’ll typically only want to refinance a car loan in a few situations.

Your credit score has improved

A good credit score is key to securing a better car loan deal. If you’ve made consistent on-time payments for six months, your score has likely increased, making you eligible for lower rates. Refinancing with a better rate can lower your monthly payments and total loan cost. Check your score and apply for pre-approval to see what new rates you qualify for.

Your income has increased

The more you make, the less likely lenders are to consider you a risk. If your income has increased, it might be worth it to refinance your car loan for a lower rate and shorter loan term. If you can afford the higher monthly payment that comes with a shorter term, you could save thousands on interest in the long run.

Your debt has decreased

If you had credit card debt or other loans when you first got your car loan that you’ve since paid off, you’ll have proof that you’re good with your finances. In addition, you’ve likely lowered your debt-to-income (DTI) ratio. This shows lenders that you can afford your repayments, especially if you plan on shortening your loan term. The less risky you look to a lender, the more likely you are to be approved for a lower rate when you refinance.

Your interest rate is high

Having an interest rate over 10% is generally a sign you may be better off finding a new lender — even if your credit hasn’t improved much. This is especially true if interest rates have dropped across the board due to the current lending market. For reference, the average car loan interest rate in Canada is currently 7.50%. Even if you don’t get the lowest rate out there after refinancing, you could walk away paying less in interest than you previously were.

Dive deeper: Explore the latest car loan interest rates in Canada

You want lower monthly payments

Refinancing can lower your monthly payments by extending your loan term, reducing your interest rate, or both. This can provide immediate financial relief if your budget has tightened or your circumstances have changed. However, extending the term may increase the overall interest you pay, so weigh the long-term costs before deciding.

You want to work with a different lender

You might want to refinance a car loan if you’re dissatisfied with your current lender for some reason. In this case, you should do plenty of research before deciding on a new provider to make sure they’ll be a better fit.

You want to remove a cosigner from your loan

You could decide to refinance if you want to get someone off of your loan agreement. For example, maybe your parents helped you cosign the loan but now your credit is good enough to manage on your own.

You want to refinance to get cash back

You might want to refinance a car loan for a larger amount than what you owe to tap into the equity in your car. This will let you borrow enough to pay off your old loan contract and get a bit of extra cash on the side.

When is it not a good idea to refinance a car loan?

You should avoid refinancing a car loan in the following situations:

Your credit score has gone down due to late payments

If your credit score has gone down since you first applied, you may be offered worse loan terms. This can happen if you’ve missed bill payments or you have outstanding bills that have been sent to collections. In general, lenders want to see multiple months of on-time payments before approving you for refinancing.

You have a year or less left on your loan

It can be tempting to stretch your term out to get lower monthly payments. Just keep in mind that the sooner you pay off your loan, the less interest you’ll pay and the quicker you’ll own your vehicle outright.

Your current loan has high prepayment penalties

You might want to avoid car loan refinancing if your current loan will charge you high fees for early repayment. Check your loan contract or contact your lender to find out more about prepayment fees. You might not save much if you have to pay extra fees to get out of your original loan contract.

You’re planning to sell your car soon

It probably doesn’t make sense to refinance your car if you’re planning to sell it right away. In this case, you can simply make the sale and use the money you get to pay off your car loan. Learn more about selling your car.

You don’t have a regular source of income

If you can’t prove to a lender that you can make your monthly payments, it’s likely that you’ll be denied a loan offer. You’ll have to supply proof of income — not necessarily employment — to qualify for most car loan refinancing options.

You’ve taken on more debt

If you’ve recently opened a new credit card or borrowed a personal loan, you likely won’t be in the best position to refinance your car loan.

You have an older car with significant mileage

Although there are lenders that will refinance a vehicle no matter its age or mileage, most want to see vehicles under 10 years old or 100,000 miles. This way, you avoid borrowing money on a car that might not retain its value.

Your car is worth less than your loan balance

Lenders are generally unwilling to refinance a car loan if it’s upside down — when your car loan is larger than what your car is worth.

Your loan comes with front-loaded interest

If you paid most of the interest on your car loan in the first few months or years, you don’t stand to save much if you were to refinance your car loan.

Car loan refinance calculator

• How to use this car loan refinance calculator

  Input	Current Lender	New Lender
  Loan term	n/a	Loan term offered
  Loan amount	n/a	Amount left on your car loan
  Bank name	Name of your current lender	Name of refinancing lender
  Fixed rate	Current rate	Rate offered
  Fixed period	Current loan term	Loan term offered
  Ongoing rate	If your fixed rate changes after so many months, enter the new interest rate here.	If your fixed rate changes after so many months, enter the new interest rate here.
  Upfront fees	Any one-time fees you paid	Any one-time fees you’ll pay
  Fees	Any ongoing fees that reoccur during the loan term. Select monthly or annually based on their frequency.	Any ongoing fees that will reoccur during the loan term. Select monthly or annually based on their frequency.
  Early repayment	The prepayment penalty your current lender charges, if applicable. Car loans in Canada are open, so it’s unlikely you’ll need to pay this fee.	The prepayment penalty the lender charges, if applicable. Car loans in Canada are open, so it’s unlikely you’ll need to pay this fee.

Pros and cons of refinancing a car loan

What do lenders look at when determining your eligibility to refinance a car loan?

Lenders will want to look at the following factors when deciding whether or not to approve your car loan refinance application:

• Equity. Equity is the difference between your car’s value and the amount you owe; you must not owe more than the car is worth.
• Credit score. Credit score is an indicator of how risky you are as a borrower. Higher scores result in better interest rates.
• Credit history. Credit history shows how well you’ve managed debts and payments in the past, helping lenders gauge reliability.
• Employment. Employment details like job title, income, and duration show lenders your ability to make consistent payments.
• Existing debts. Existing debts, such as loans and credit cards, reveal your current financial obligations to lenders.
• Debt-to-income ratio. Debt-to-income ratio compares your monthly debt payments to income; a lower ratio shows financial stability.

Bottom line

Refinancing your car loan can be a practical way to save money, reduce monthly payments, or secure better loan terms. By following the eight steps outlined in this guide, you can navigate the refinancing process confidently and make an informed decision. It’s essential to evaluate your financial situation carefully, including your car’s equity, creditworthiness, and current loan terms, to determine if refinancing is the right choice for you. With the right preparation and lender, refinancing can help you achieve greater financial flexibility and peace of mind.

Frequently asked questions

• Can I refinance if I'm upside down on a car loan?

  It's unlikely. Lenders typically require positive equity in your vehicle to approve refinancing. If you owe more than your car is worth, consider paying down your loan or selling the car before applying to refinance.

• Can I refinance my car with the same lender?

  Yes, lenders may allow you to refinance your car loan with them. However, it's worth shopping around to compare rates and terms from other lenders, as they might offer better deals.

• Can I refinance a car loan with bad credit?

  You can, but it may not always be beneficial. Refinancing with bad credit usually leads to higher interest rates, which may not improve your financial situation. However, if you need lower monthly payments, refinancing can help by extending your loan term. Keep in mind that a longer loan term means paying more interest overall.

• How soon can I refinance a car loan?

  You can typically refinance after just a few weeks or months of on-time payments, though some lenders may require you to pay a penalty fee to refinance.

• Does refinancing hurt my credit?

  Refinancing may cause a temporary dip in your credit score due to a hard inquiry, but making consistent payments on the new loan can help your score recover.

• What fees are involved in refinancing a car loan?

  Fees may include loan origination fees, title transfer fees or prepayment penalties on your existing loan. Check these costs before refinancing to ensure it's worth it.