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Key takeaways
- Refinancing pays off your current car loan with a new loan, usually from a different lender.
- It saves the most when your credit has improved or you first borrowed at a high dealer rate.
- A longer term lowers your payment but can cost more interest overall.
- Check for prepayment penalties and fees before you switch, and compare the total cost.
What is car loan refinancing?
When you refinance a car loan, a new lender pays off what you still owe on your current loan and you start making payments on a new one. The new loan can have a different interest rate, a different term or both. Your car stays with you, and the new lender registers its own lien on it.
People usually refinance to lower their interest rate, reduce their monthly payment, pay the car off sooner or take cash out of the equity they’ve built.
When refinancing makes sense
Your credit has improved
If your score has gone up since you bought the car, you may now qualify for a much lower rate.
You took dealer financing
Rates arranged at the dealership aren’t always the best you can get. A bank, credit union or online lender may beat them.
Rates have dropped
If interest rates have fallen since you signed, a new loan can lock in the lower rate.
Your payment is too high
A longer term can make your payment more manageable when your budget changes.
You want to pay it off faster
A shorter term at a lower rate can cut the total interest you pay.
You want to change co-signers
Refinancing in your own name can release a co-signer from the loan, if you qualify on your own.
Life changes count too. A new baby, a move, a new job or retirement can all change what payment fits your budget.
Should you refinance? A quick check
Count how many of these are true for you:
- Rates are lower. You can get a rate at least 1 percentage point below your current one. Less than that, and fees often eat the savings.
- Your credit is better. Your score has gone up meaningfully, around 50 points or more, since you took out the loan.
- You have time left. There are 12 months or more left on the loan, so a lower rate has time to add up.
- You have equity. Your car is worth more than you owe on it.
- You know your goal. You’re clear on whether you need a lower payment now or the lowest total cost.
4 or 5 true: refinancing will very likely save you money. 2 or 3: get a few quotes and compare the total cost. 0 or 1: you’re probably better off keeping your current loan.
How much could you save?
Here’s an example with $20,000 left on a loan with 48 months to go. Refinancing from 14.99% to 8.99% cuts the payment and the interest. Stretching the new loan to 72 months lowers the payment further, but you pay interest for longer.
| Loan | Rate | Term | Monthly payment | Total interest |
|---|---|---|---|---|
| Current loan | 14.99% | 48 months | $556.51 | $6,712.65 |
| Refinance, same term | 8.99% | 48 months | $497.61 | $3,885.08 |
| Refinance, longer term | 8.99% | 72 months | $360.41 | $5,949.63 |
Example only. Your rate depends on your credit, income, vehicle and lender. Fees aren’t included.
Run your own numbers with our car loan calculator: enter your remaining balance as the vehicle price and compare terms.
Car refinancing requirements
Every lender sets its own rules, but most look at:
Your credit
A better score gets a better rate. Some lenders work with fair and poor credit too.
Payment history
Many lenders want 6 to 12 months of on-time payments on your current loan.
Income and debts
Proof of steady income and a debt load that leaves room for the payment.
Vehicle age and mileage
Many lenders limit how old the car can be and how many kilometres it has.
Equity in the car
It’s easier to qualify when the car is worth more than you owe.
Documents
Driver’s licence, vehicle registration, insurance, recent pay stubs and a payout statement from your current lender.
Costs and fees to watch for
A lower rate only helps if the fees don’t eat up the savings. Ask about:
- Prepayment penalties on your current loan. Many car loans are open, but check your agreement.
- Lien registration fees to register the new lender’s lien on your car.
- Administration or origination fees charged by the new lender.
- Add-ons rolled into the loan, like creditor insurance or extended warranties. They’re optional, and they raise your balance.
Your new loan agreement has to show the APR and the total cost of borrowing, so you can compare it with what’s left on your current loan.
Cash-out refinancing
If your car is worth more than you owe, some lenders will let you borrow more than your balance and give you the difference in cash. It can be cheaper than an unsecured loan or a car title loan, but it increases what you owe on a car that loses value every year.
Use cash-out refinancing for things that improve your finances, like paying off high-interest debt, not everyday spending. Your car secures the loan, so missing payments can still lead to repossession.
What if you owe more than the car is worth?
Owing more than your car is worth is called negative equity, or being “upside down”. It’s common in the first years of a long loan, and it makes refinancing harder because the lender would be lending more than the car is worth.
Some lenders will still refinance with a small gap, especially if your credit is strong. Otherwise, you can pay down the balance first, make a lump-sum payment when you refinance, or wait until your payments catch up with the car’s value.
Be careful about rolling negative equity into a new loan, whether you refinance or trade the car in. You’ll pay interest on money that no longer has a car behind it.
Pros and cons of refinancing a car loan
Pros
- A lower rate can save you hundreds or thousands
- A lower monthly payment frees up your budget
- You can shorten the term and own the car sooner
- You can release a co-signer or take out equity
Cons
- A longer term can mean more interest overall
- Fees and penalties can cancel out the savings
- A hard credit check can dip your score briefly
- Older, high-mileage cars can be hard to refinance
How to refinance your car loan
Most refinances can be done online and take one to three weeks from application to payout.
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Check your current loan
Find your rate, remaining balance and months left, and ask your lender for a payout statement and whether there’s a prepayment penalty.
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Check your credit and your car’s value
Look up your credit score for free and estimate your car’s value to see how much equity you have.
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Compare offers
Get quotes from at least three lenders within a couple of weeks. Many offer pre-qualification with a soft credit check, which doesn’t affect your score. Compare the APR, the term and the total cost, not just the payment.
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Apply and sign
Send your documents and review the agreement carefully. The new lender pays off your old loan and registers its lien.
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Confirm the old loan is closed
Make payments on the old loan until you’re sure it’s paid off, then check that its lien is discharged and set up payments on the new one.
Tips for getting the best rate
- Clean up your credit report. Get your free reports from Equifax and TransUnion and dispute any errors before you apply.
- Pay down credit card balances. Using less of your available credit can raise your score within a month or two.
- Use competing offers. Lenders may lower their rate to win your business if you show them a better quote.
- Skip the add-ons. Optional insurance and warranties raise your balance and the interest you pay on it.
Refinancing vs. trading in your car
Refinance if…
You like your car and want to keep it, it’s in good shape, and you can get a lower rate or a payment that fits better.
Trade in if…
The car no longer suits your needs or is costing you in repairs, and you have enough equity to put toward a cheaper or newer vehicle. See where to buy a car in Canada.
Alternatives to refinancing
If you don’t qualify for a better loan, or the savings don’t cover the fees, you still have options:
Make extra payments
Paying extra toward the principal shortens the loan and cuts the interest, if your loan allows it without a penalty.
Talk to your lender
Ask about a lower rate, a longer term or a short payment deferral if money is tight. Many lenders would rather adjust the loan than repossess.
Pay accelerated bi-weekly
Paying half your monthly payment every two weeks adds up to one extra monthly payment a year, which trims the interest.
Build your credit first
A few months of work on your score can unlock a much better rate later. Start with our credit building guide.
Car refinancing FAQ
How soon can I refinance my car loan?
There’s no legal waiting period, but most lenders want you to wait at least a few months after buying, and some want six months or more. That gives the original lien time to register and builds a payment history the new lender can check. Your current loan agreement may also limit early refinancing, so read it first.
Is it worth refinancing for a 1% lower rate?
It depends on how much you owe and how long is left. Dropping from 9% to 8% saves about $867.53 in interest on $30,000 over 60 months, but only about $109.79 on $10,000 over 24 months, which fees can easily cancel out. The bigger the balance and the longer the term, the more a small rate cut is worth.
Will refinancing hurt my credit score?
Applying usually triggers a hard credit check, which can lower your score by a few points for a short time. Shopping for rates within a couple of weeks keeps the impact small. Over time, a lower payment you can make on time every month can help your score.
Can I refinance a car loan with bad credit?
Yes. Some lenders specialise in refinancing for fair or poor credit. If your score has improved since you bought the car, or you first borrowed at a high dealer rate, you may still qualify for a lower rate. See our credit building guide to improve your odds.
Can I refinance my car loan into someone else’s name?
Not usually. A lender can’t simply move your loan to another person. They would have to qualify for their own loan to buy the car from you, and the money would pay off your loan before the ownership is transferred.
Can I refinance with the same lender?
Sometimes. Ask your current lender whether they’ll lower your rate or change your term. If they won’t, another bank, credit union or auto lender can pay off your loan and give you a new one.
Can I refinance a leased car?
Not directly, since you don’t own a leased car. You can finance a lease buyout instead: a lender pays the buyout price to the leasing company and you repay a regular car loan.
Is there a penalty for paying off my car loan early?
Many car loans in Canada are open and can be paid off at any time without a penalty, but not all. Check your loan agreement or ask your lender for a payout statement, which lists the exact amount needed to close the loan, including any fees.
Paying too much for your car loan?
See your refinancing options in minutes. Checking won’t affect your credit score.