If you already have a car loan, you might be wondering if refinancing could save you money or better suit your financial situation. Refinancing means replacing your current auto loan with a new one — often with different terms, such as a lower interest rate, a longer or shorter repayment period, or adjusted monthly payments.
So, why consider refinancing?
A lower interest rate can reduce the total amount you pay over time.
Extending your loan term can lower your monthly payments (though it may cost more in interest in the long run).
Shortening your term allows you to pay off your vehicle sooner and save on interest.
If your financial situation has improved since you first took out your car loan, you may qualify for better terms, which could reduce your overall costs.
Let's take a closer look at car refinancing, including what it is, how the process works, and its potential benefits.
What is Car Loan Refinancing in Canada?
Refinancing a car loan is a lot simpler than it may sound. All it means is that if you have an existing loan that is no longer working for you. You can then choose a better car loan option to cover your current loan in full. Basically, it is just another type of personal loan aimed at improving your long-term budget.
For instance, if your credit score has recently improved, you can contact your lender and inquire about a credit history review. You might get a better deal. Once you receive the new offer, it will cover the original one, and you will proceed with making more manageable loan payments.
How Does Car Refinancing Work?
Vehicle loans are exceptionally popular in Canada, but that does not mean that all offers are equally beneficial to the owner. If you notice that your interest rates or monthly payments are too high, you can apply for loan refinancing. The process is fairly simple. You can start by researching available lenders and evaluating their loan offers and conditions. Once you find the one that best suits your needs, you can submit a loan refinancing application. The chosen lender will review your credit score, vehicle details, and make an offer if you qualify for their terms and requirements.
The success of your application depends heavily on factors like credit score, history and your perceived creditworthiness in general. Remember, applying for refinancing typically requires a hard credit check. This can negatively affect your current credit score, but only temporarily.
When Should You Refinance Your Car Loan?
There isn't a perfect situation or timing for you to refinance your car loan. Even though it can be a smart way to save, it's not always the right move. Some lenders charge fees along with other payment conditions. That is why, before you make a decision, take a look at how much you'd actually save. In the right situation, refinancing can reduce your monthly payments and interest, or help you pay off your car faster.
Here's are a few common scenarios where refinancing makes the most sense:
When You Want to Reduce Costs
The second quarter of 2025 shows that prices for used cars in Canada are on a slight increase, while the new-auto market seems to have stabilized a little. Such trends indicate that refinancing right now could be a wise choice for some car owners. Let’s explain why.
Because higher used-car values improve your loan-to-value (LTV), you may qualify for a lower interest rate or better terms. A lower interest rate means paying less interest overall. Rising car values can also reduce or eliminate negative equity, lowering risk. Just make sure fees or prepayment penalties don’t wipe out the savings.
Finding a lower interest rate through refinancing will also reduce your costs. If your credit score has gone up since you first got the loan, it's worth asking your lender if they can offer a better rate. You can also check out other dealer financing options to see if they have any refinancing deals.
When You Want to Adjust the Terms or Conditions of Your Loan
You can extend or shorten the length of your loan by refinancing. A longer loan term means lower car payments. Just remember that you'll end up paying more interest overall. On the other hand, choosing a shorter term means you'll pay off your car faster and save on interest. However, your monthly payments will be higher. It's all about what fits your budget right now. Refinancing also gives you the chance to change other parts of your loan. For example, you might remove a co-signer if you no longer need one.
When You Want to Change Lenders
If you want to change lenders, opt for refinancing. Do you want to move your car loan from a bank or another lender to a credit union? We can help.
Car Loan Refinancing: Is It Right for You?
To better understand where you stand with car loan refinancing, here are pros, cons, and insights that may help:
Aspect | Pros | Cons | Examples | Key Insights |
Interest rates | Lower rates available | Potential repayment penalties | Matt refinanced to reduce his rate from 6% to 4% saving on interest charges over the lifespan of the loan. | A lower interest rate is a good solution as long as the potential penalties do not eliminate potential savings. |
Monthly payments | Lower monthly payments | Higher overall interest costs | John couldn't afford to pay $430 a month, so he chose to extend the term of the loan and reduce the monthly payments to $290. | Lower payments may ease the current financial burden, but will result in higher overall loan costs. |
Loan repayment speed | Short-term repayment | Faster payout is not always possible | Megan kept her 4-year term and got a better rate. Her lender allowed her to make additional payments with no penalty, so she chose to pay a bit extra and finished 9 months early. | Refinancing to a lower rate with the same term maximizes interest savings. Treat early payoff as optional. Only do it if your loan allows it without penalty and if your budget permits. |
Cash access | Optional cash-outs | Overall debt increase | Chris has a $15,000 loan, but refinanced it to $18,000 to help fund an unexpected cost.. | While cash-outs seem like a favorable opportunity, it is best to use the feature only for emergency financial needs. |
Fees and charges | Minimal fees with the right lender | Additional legal and administrative fees may apply | Ingrit's new lender charged $350 in additional fees, which cancelled out her overall savings. | Refinancing may involve hidden costs that you should inquire about before signing an agreement. |
How Do You Refinance an Auto Loan in Canada?
The decision to refinance must be thought out carefully to ensure its benefits outweigh potential drawbacks. How do you know it's the right time to refinance your vehicle? There are a few things to consider:
Conditions of your existing agreement: Pay attention to interest rates, repayment schedules, and prepayment penalties. Write these factors down to compare your current deal to other car loan refinance offers.
Your refinancing objectives: Do you want a lower monthly payment? Are you looking to pay off your loan faster? Do you want to switch from a variable to a fixed interest rate, or tap into your home equity?
Important: While lowering your monthly payment might ease your budget, it could result in paying more overall in the long run.
New loan options: You can work with a new lender or stay with your existing financial institution when you choose to refinance your car loan. However, as the new loan replaces the current one, it must have more advantages than the previous offer.
Documents Required for Refinancing
The exact list of documents you'll have to provide when getting your car loan refinanced will depend on the specific lender. To avoid undue delays and get straight to refinancing, make sure you have these commonly required documents ready:
Tax data: Gather your T4s, as lenders often ask for tax-related information. Keep in mind that a self-employed applicant will have to provide Notices of Assessments and three-year proof of tax return.
Pay stubs: Ensure you have pay stubs from your employer for the last three months. If you're self-employed, prepare a relevant income statement or bank statement showing consistent earnings.
Bank or credit union information: Provide a recent account statement reflecting all relevant banking information within your account.
Personal verification documents: Bring your personal identification documents (government-issued photo ID plus one other identity verification document), proof of residence, proof of employment, and driver's license.
Vehicle information: Prepare all vehicle-related documents, including car insurance, car registration paperwork, as well as your vehicle's model, make, and identification number.
Current lender's information: Gather pertinent details regarding your current loan conditions and the payoff amount for the existing car loan.
Residence details: Whether you rent or own a home, you will have to disclose such details as utility bills, property taxes, and other related payments.
Employment information: If you are currently employed, you may be asked to provide personal details that concern your employer, disclose the industry you work in, and how long you've been assigned to the current position.
Assets and liabilities: In case you have any personal assets like savings and property or active debts, you will have to report those too.
Note: The lender may require that you disclose any previous bankruptcy statements, alimonies, child support, or consumer proposals.
Car Loan Refinancing Steps
Refinancing involves a few steps. First, start by determining whether this financial decision fits your circumstances. Then, assess the options available for refinancing your loan. Finally, obtain all the required documents needed for you to apply for refinancing.
Still hesitant about applying? Below is a detailed description of each stage of the process.
Step 1. Check If Car Refinancing Is the Right Option for You
Though auto refinancing seems like the perfect solution for getting better interest rates and overall terms for your car loan, it's not always the case.
It's crucial to assess the conditions of your current contract, i.e., its interest rate, repayment plan, and negotiated prepayment fees. Use these characteristics as metrics for comparing your existing loan to other auto loan refinancing deals.
Run the numbers to make sure the interest rate and monthly payments on your refinanced loan actually help you save money, which is the main goal of refinancing.
Step 2. Justify Your Refinancing Plan
Before committing to a new arrangement, make sure you know exactly what you're signing up for. Contact your existing lender (if you want to stick with them) or approach a new one to discuss the refinancing options for car loans. Check out the exact refinancing penalties and compare them to the potential savings associated with new car loans.
Make all the calculations to justify your refinancing decision. Account for immediate and long-term savings to understand whether opting for a new loan to cover the existing one is worth the effort.
Step 3. Prepare the Required Documents and Apply for Car Refinancing
Preparing to refinance a car loan in Canada starts with gathering all the documents required to submit an application. As mentioned earlier, the process resembles applying for a loan for a car purchase. So, you might already have all you need to proceed. While the exact documents you'll have to provide depend on your lender, there are some general rules.
Make sure you have your tax data, pay stubs, bank information, and personal verification information in place. Plus, be ready to hand in all vehicle-related documents, including car insurance, car registration paperwork, as well as your vehicle's model, make, and identification number.
What to Consider Before Refinancing
As with any financial decision, refinancing works best if it's a well-thought-through step. The specifics of your current financial standing, your credit score, the terms of the existing vs. new car loan, readiness to pay higher vs. lower monthly payments, and changes in interest rates are all factors you should consider. Let's explore these points in detail:
Financial situation: Your focus in preparing for refinancing should be on your current financial position. Are you ready to follow new conditions? What is the exact amount you'll be comfortable having as your monthly payment to refinance your car loan?
Credit score: You should also examine your credit score for a car loan to clarify what interest rate you're likely to qualify for. The primary aspect to research is whether your score has gone up. If it has, refinancing may be a smart move.
New loan term: A loan with an extended term means you're likely to spend more in interest over the lifetime of your loan. If your income allows for higher monthly payments, consider a shorter loan term to eliminate additional costs.
Monthly payments: Loans with lower monthly payments typically mean you have a longer loan term. This also means paying more interest in the long run. While it might seem enticing to eliminate the immediate burden of higher monthly payments, consider the situation from a broader perspective to make the most rational decision.
Interest rates: Most people seek refinancing to lower their existing interest rates. However, lower rates work only if you opt for a well-planned repayment schedule. If you extend your loan payment over a considerable time frame, lower interest rates are likely to make little difference to your savings strategy.
Simple Ways to Improve Your Credit Score
Need to improve your credit score before applying for car refinancing? It may take some time, but it will be worth the effort. Here are some simple tips that will help.
Focus on Timely Payments
No matter how small the bill is, it is best to pay it on time. Why? Because late payments will hurt your score, and the negative effect will stick with you for a long time.
Start Small
If you already have an auto loan, you likely have a credit score. In that case, your best “start small” move is simply to make every payment on time and keep balances low. You may not need to apply for anything new.
You can also build your score with a secured credit card. The key here is to use no more than you need and pay it off on time.
Minimize Your Credit Activity
If you apply for too many loans or your credit activity suddenly spikes, the lenders will see it as a red flag and may be unwilling to work with you.
Tips for Car Loan Refinancing
A successful refinancing application requires careful preparation and a fair share of expert advice. Want to know how to refinance your car loan so that you reap all the perks available? Use these practical tips before, during, and after refinancing:
Talk to your lender: Many people assume that to get a better deal, you must find a new lender. However, in some cases, your current lender may be able to offer you the benefits you need.
Avoid refinancing if you owe too much: In some cases, the loan balance is higher than the car's value. If this applies to you, refinancing isn't the best choice since you will end up paying more in the long run. That’s because negative equity gets rolled into the new loan, often over a longer term with added fees. So, you’re paying interest on a larger balance for more time, even if the monthly payment looks lower.
Ready to Get Started?
If your car loan feels more like a burden than a benefit, refinancing might fix that. This isn't about rate-chasing. It's about keeping more money in your pocket each month without extending the loan indefinitely. Do you think that your car is still worth more than you owe? Has your credit recently improved? Then refinancing can be the right option for you.
Want further advice? Contact us to discuss your auto refinancing questions and needs. We're here to help!