Auto Loan Refinancing: When and How to Lower Your Car Payment

If you're struggling with high monthly car payments or paying excessive interest on your auto loan, refinancing could save you thousands of dollars. Many Canadians don't realize they can refinance their auto loans just like mortgages, often with minimal hassle and significant savings.

This comprehensive guide explains when refinancing makes sense, how the process works, and how to maximize your savings.

What is Auto Loan Refinancing?

Auto loan refinancing means replacing your current car loan with a new loan that has better terms. The new lender pays off your existing loan, and you begin making payments to the new lender under the new terms.

Why Refinance?

Lower your interest rate: If your credit has improved or market rates have dropped, you may qualify for a significantly lower rate.

Reduce your monthly payment: Extending your loan term or lowering your interest rate can decrease your monthly payment, freeing up cash for other expenses.

Shorten your loan term: If you can afford higher payments, refinancing to a shorter term saves money on interest.

Remove a co-signer: If your credit has improved, you may qualify on your own and release your co-signer from the obligation.

Change lenders: Switch from a predatory lender to a reputable one with better customer service and terms.

When Should You Refinance?

Your Credit Score Has Improved

This is the #1 reason to refinance. If your credit score has increased by 50+ points since you got your original loan, you likely qualify for a much better interest rate.

Example: You financed a $20,000 vehicle at 18% APR with a 580 credit score. After 18 months of on-time payments, your score is now 680. Refinancing to 10% APR could save you $3,000-5,000 over the remaining loan term.

How much improvement do you need? Generally, a 50-100 point increase makes refinancing worthwhile. Even 30-40 points can help if you started with very poor credit.

Interest Rates Have Dropped

If market interest rates have decreased since you got your loan, refinancing can lock in lower rates even if your credit score hasn't changed.

When to check: Monitor interest rates quarterly. If rates have dropped 2+ percentage points, it's worth exploring refinancing.

You Have Positive Equity

Positive equity means your vehicle is worth more than you owe. This makes refinancing easier and may qualify you for better rates.

How to check: Look up your vehicle's value on Canadian Black Book or Autotrader, then compare it to your loan payoff amount.

Example: Your vehicle is worth $18,000, and you owe $15,000. You have $3,000 in positive equity.

You're Struggling with Payments

If your financial situation has changed and you're having trouble making payments, refinancing to a longer term can reduce your monthly payment.

Important: While this provides short-term relief, extending your loan term means paying more interest overall. Only do this if necessary to avoid default.

You Want to Pay Off Your Loan Faster

If your income has increased, refinancing to a shorter term with a lower rate lets you pay off the loan faster while saving on interest.

Example: Refinancing from a 72-month loan at 15% to a 48-month loan at 10% increases your monthly payment but saves thousands in interest and frees you from debt sooner.

When Should You NOT Refinance?

Your Loan is Nearly Paid Off

If you have less than 12 months remaining, refinancing rarely makes sense. The fees and administrative costs outweigh the potential savings.

Your Vehicle Has High Mileage or is Very Old

Most lenders won't refinance vehicles over 10-12 years old or with more than 200,000 km. The vehicle serves as collateral, and lenders want to ensure it retains value.

You Have Negative Equity

If you owe more than your vehicle is worth (upside down), refinancing is difficult. Some lenders will refinance negative equity, but you'll pay higher rates.

How to handle negative equity: Continue making payments to build equity, or consider trading in for a less expensive vehicle.

You Have Prepayment Penalties

Some loans charge fees for paying off early. Check your loan agreement for prepayment penalties. If the penalty exceeds your potential savings, refinancing doesn't make sense.

Your Credit Has Gotten Worse

If your credit score has dropped significantly since your original loan, refinancing will likely result in worse terms. Focus on improving your credit first.

How Much Can You Save?

Let's look at real examples of refinancing savings:

Example 1: Credit Score Improvement

Original Loan:

• Amount: $20,000
• Interest Rate: 18% APR
• Term: 72 months
• Monthly Payment: $427
• Total Interest Paid: $10,744

Refinanced Loan (after 18 months):

• Remaining Balance: $16,500
• New Interest Rate: 10% APR
• New Term: 54 months
• New Monthly Payment: $355
• Total Interest Paid: $2,670

Savings: $8,074 in interest + $72/month lower payment

Example 2: Lower Monthly Payment

Original Loan:

• Amount: $15,000
• Interest Rate: 15% APR
• Term: 60 months
• Monthly Payment: $356

Refinanced Loan:

• Remaining Balance: $12,000
• New Interest Rate: 12% APR
• New Term: 72 months
• New Monthly Payment: $239

Result: $117/month savings (but $1,200 more in total interest)

Example 3: Shorter Term

Original Loan:

• Amount: $18,000
• Interest Rate: 14% APR
• Term: 72 months
• Monthly Payment: $349
• Total Interest Paid: $7,128

Refinanced Loan:

• Remaining Balance: $15,000
• New Interest Rate: 9% APR
• New Term: 36 months
• New Monthly Payment: $477
• Total Interest Paid: $2,172

Result: Pay off loan 36 months sooner, save $4,956 in interest

The Refinancing Process: Step by Step

Step 1: Check Your Credit Score

Before applying, check your credit score using free services like Credit Karma or Borrowell. This helps you understand what rates you might qualify for.

Credit Score Ranges and Expected Rates:

• 750+: 5-8% APR
• 700-749: 8-12% APR
• 650-699: 12-16% APR
• 600-649: 16-20% APR
• Below 600: 20-25% APR

Step 2: Determine Your Vehicle's Value

Look up your vehicle's current market value using:

• Canadian Black Book
• Autotrader
• Kelley Blue Book

Be honest about your vehicle's condition. Lenders will verify the value.

Step 3: Get Your Loan Payoff Amount

Contact your current lender and request your payoff amount. This is usually slightly higher than your remaining balance due to interest.

Important: Get a 10-day payoff quote, as interest accrues daily.

Step 4: Shop for Rates

Don't accept the first offer. Compare rates from:

• Your current bank or credit union
• Online lenders
• Auto loan specialists like Canada Auto Approval

Pro tip: Apply to multiple lenders within a 14-day window. Credit bureaus count multiple auto loan inquiries in this period as a single inquiry, minimizing the impact on your credit score.

Step 5: Compare Offers

Don't just look at the monthly payment. Compare:

• Interest rate (APR)
• Loan term length
• Total interest paid over life of loan
• Any fees (origination, processing, prepayment penalties)
• Monthly payment amount

Use this formula to calculate total cost: Monthly Payment × Number of Months = Total Amount Paid Total Amount Paid - Loan Amount = Total Interest Paid

Step 6: Apply for Refinancing

Once you've chosen a lender, complete the full application. You'll need:

• Government-issued photo ID
• Proof of income (pay stubs, tax returns)
• Proof of residence
• Vehicle information (VIN, registration, insurance)
• Current loan information

Step 7: Vehicle Inspection (If Required)

Some lenders require a vehicle inspection to verify condition and value. This typically costs $50-150.

Step 8: Review and Sign Documents

Carefully review all documents before signing:

• Loan agreement
• Truth in Lending disclosure
• Payment schedule
• Any additional fees

Ask questions about anything you don't understand. Don't sign until you're completely comfortable with the terms.

Step 9: Payoff of Old Loan

Your new lender will pay off your old loan directly. This typically takes 7-10 business days.

Important: Continue making payments to your old lender until you receive confirmation the loan is paid off. Missing a payment during the transition can damage your credit.

Step 10: Start Making New Payments

Once the old loan is paid off, begin making payments to your new lender. Set up automatic payments to never miss a due date.

Fees and Costs to Consider

Origination Fees

Some lenders charge 1-2% of the loan amount to process the refinance. Factor this into your savings calculation.

Title Transfer Fees

Changing lenders requires updating the vehicle title, which may cost $50-150 depending on your province.

Prepayment Penalties

Check your current loan for prepayment penalties. These can range from $100-500 or a percentage of the remaining balance.

Inspection Fees

If required, vehicle inspections typically cost $50-150.

Registration Fees

Some provinces require re-registration when changing lenders, costing $50-100.

Calculate total costs: Add up all fees and subtract from your expected interest savings to determine your net savings.

Tips for Getting the Best Refinance Rate

Improve Your Credit First

If you have time, spend 3-6 months improving your credit before refinancing:

• Pay down credit card balances
• Make all payments on time
• Dispute any errors on your credit report
• Avoid new credit applications

Even a 30-50 point improvement can significantly lower your interest rate.

Consider a Shorter Loan Term

If you can afford higher monthly payments, a shorter term almost always comes with a lower interest rate. This saves you money two ways: lower rate and less time paying interest.

Make a Lump Sum Payment

If you have savings, making a lump sum payment before refinancing reduces your loan amount, which can qualify you for better rates.

Shop During Promotional Periods

Some lenders offer promotional rates during certain times of year (end of year, holiday weekends). Time your refinancing to take advantage of these offers.

Use a Co-Signer

If your credit is still marginal, having a co-signer with good credit can significantly improve your rate. Just make sure they understand the responsibility—they're equally liable for the loan.

Common Refinancing Mistakes

Mistake 1: Focusing Only on Monthly Payment

A lower monthly payment often means a longer loan term and more total interest paid. Always calculate total cost, not just monthly payment.

Mistake 2: Refinancing Too Soon

Most lenders require you to have your current loan for at least 6-12 months before refinancing. Applying too soon results in automatic denial.

Mistake 3: Not Shopping Around

Rates can vary by 3-5 percentage points between lenders. Always get at least 3-4 quotes before deciding.

Mistake 4: Ignoring Fees

High fees can negate your interest savings. Factor all costs into your decision.

Mistake 5: Extending the Term Too Much

While a 84-month loan has a low monthly payment, you'll pay thousands more in interest and be underwater (owe more than the car is worth) for years.

After You Refinance

Set Up Automatic Payments

Never miss a payment. Set up automatic payments from your checking account.

Monitor Your Credit

Your credit score should improve as you make on-time payments on your new loan. Check your score quarterly.

Consider Refinancing Again

If your credit continues to improve or rates drop further, you can refinance again after 12-18 months.

Pay Extra When Possible

Making extra payments toward principal reduces your total interest and pays off the loan faster. Even an extra $50/month makes a difference.

Keep Your Vehicle Well-Maintained

Since your vehicle is collateral, maintain it properly. This protects your investment and ensures you can refinance again if needed.

Ready to Refinance?

If you've been making payments on time and your credit has improved, refinancing could save you thousands of dollars. Don't leave money on the table—explore your options today.

At Canada Auto Approval, we specialize in auto loan refinancing for all credit situations. Whether you started with bad credit and have improved, or you simply want to take advantage of lower rates, we can help.

Our network of 25+ lenders means we can find you the best rate available for your situation. Get a free refinancing quote in just 3 minutes with no impact to your credit score.

Start saving money today—you've earned it.