How to Refinance a Car Loan in Canada

This page is general information, not legal or financial advice.

Refinancing means taking out a new loan to pay off your current car loan. Done well, it can lower your interest cost or ease your monthly budget. Done carelessly, it can extend your debt and cost more overall. This page explains how it works and how to tell which outcome you are heading toward.

What refinancing does

A new lender (or sometimes your existing one) pays off your current balance. You then repay the new lender under new terms: a new rate, a new term and possibly new fees. Your vehicle stays the same, but it becomes the security for the new loan.

This site is informational only and does not provide or arrange loans. Refinancing is done directly with banks, credit unions and other lenders.

Reasons people refinance

• Lower interest rate. Your credit may have improved since you took the original loan, or the original rate was high.
• Lower monthly payment. You may extend the term to reduce the payment.
• Remove a co-signer. Some lenders allow a new loan in only one name if income and credit support it.
• Escape a poor dealer-arranged loan. Some buyers refinance after finding the original rate was higher than other offers available. A loan pre-approval next time lets you compare first.
• Shorter term. A higher payment but less total interest, if your budget has room.

When it usually does not help

• You are in the last year or so of the loan, when most of the interest has already been paid.
• Your credit has not improved or has worsened.
• The vehicle is older or high in kilometres and falls outside lender limits.
• You owe more than the vehicle is worth.
• Fees and penalties are large relative to the interest savings.
• You would extend the term so much that total interest goes up, even with a lower rate.

Refinancing and loan length

A lower payment is not the same as a cheaper loan. Stretching a loan from, say, three remaining years to five can cut the monthly payment while raising total interest. Compare the full cost under each scenario. The trade-offs are covered in car loan length: 60, 72, 84 months.

A good habit is to keep the same or shorter remaining term if you can afford the payment. That way a lower rate translates into real savings.

What lenders look at

Requirements vary, but common factors are:

If your credit is the barrier, see car loans with bad credit for realistic options and the risks of high-cost lenders. Rates are shaped by many factors, which are explained in how car loan interest rates work in Canada.

Costs and penalties to check

Before you apply, gather these details:

• Payout statement. Ask your current lender for a written payout amount and the date it is valid until.
• Prepayment penalty or fees. Review your loan contract for any early payout charges.
• New loan fees. Ask about application, administration or registration fees, including any lien registration charges.
• Insurance requirements. Lenders usually require full coverage with them listed as lienholder.
• Add-ons. Confirm that optional products are not being rolled into the new loan without your agreement.

Fees and rules differ between lenders and provinces, so confirm current figures directly with each.

Step-by-step: how to refinance

1. Get your numbers. Find your current rate, remaining balance, remaining term and payment.
2. Check your credit. Review your credit report for errors and see where you stand.
3. Estimate your vehicle’s value. Compare it to your balance to see whether negative equity is a problem.
4. Request quotes. Contact at least two or three lenders. Ask whether the first quote uses a soft check.
5. Compare total cost. Use the same term for every comparison, then add fees.
6. Read the contract. Confirm rate, term, fees, prepayment rules and any required products.
7. Keep paying until payout completes. Do not stop payments on the old loan until you have confirmation that it has been paid off.
8. Get proof of payout. Keep the closing documents and confirm the lien was released and registered as intended.

A simple comparison method

Write out two columns: keep the current loan versus refinance. For each, list the remaining interest cost, the monthly payment, the remaining term and any fees. The one with the lower total cost and a payment you can sustain is generally the better choice. If the lower payment comes mainly from a longer term, treat that as a budget choice, not a saving.

Refinancing versus other options

• Pay extra on the current loan. If your contract allows it, this reduces interest without a new application.
• Sell or trade the vehicle. If you owe more than it is worth, read about GAP insurance and the effect of depreciation before you decide.
• Talk to your current lender. Some will adjust terms if you ask, especially if your payment history is strong.

For the larger picture, see the complete guide to car loans in Canada. The Financial Consumer Agency of Canada publishes free information on borrowing, and you should confirm current rates and rules with your lender.

Key takeaways

• Refinancing swaps your loan for a new one, so compare total cost, not just the payment.
• It works best with a higher original rate, better credit and a long remaining term.
• Negative equity, older vehicles and short balances can make approval or savings unlikely.
• Get a written payout statement and check for prepayment charges and new fees.
• Keep paying the old loan until payout is confirmed.

Informational only. AutoChoice.ca does not sell vehicles or provide financing, insurance, legal or tax advice. Rates, fees and rules change and vary by province; confirm with the dealer, lender, insurer or government agency before you act. See the disclaimer.