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When Is It a Good Time To Refinance Your Car Loan?

In collaboration with Loans Canada

Do you already have an auto loan to help finance your car? Are you looking to take advantage of lower interest rates to save money on your existing loan? If so, refinancing your loan could help you save money over the long haul and ease your financial burden. 

If keeping more money in your pocket is on your agenda for the new year, you may want to consider refinancing your current car loan for one that comes with a lower interest rate. Let's take a look at auto loan refinancing to see if it's the right fit for you.

How Refinancing a Car Loan Works

Refinancing an auto loan involves taking out a new loan to pay off the remainder of your existing car loan principal. Like your original car loan, refinancing is secured by your vehicle and paid off in regular installments over a certain amount of time until the amount is paid off. Your replacement loan will come with new terms and a new interest rate, hopefully lower than what you're paying right now. 

Can Anyone Refinance Their Car Loan?

Before you apply to have your auto loan refinanced, it's important that you understand the requirements for such an arrangement, which typically include the following:

Age of your vehicle - It's no secret that cars depreciate over time, which starts the moment they are driven off the dealer's lot. Older vehicles passed a certain age might not qualify for a refinance, for obvious reasons. Lenders don't want to have an old vehicle being used as collateral if there's not much life left in them (this page has good information on vehicle collateral loans). The maximum age requirement will vary from lender to lender, but it's typically within the range of seven to 10 years.

Type of vehicle - Certain vehicle types might not qualify for auto loan refinancing, such as commercial vehicles or RVs. 

Mileage - Similar to the vehicle's age, a vehicle with a certain amount of kilometres on it might not be eligible for an auto loan refinance. Lenders may have their own maximum when it comes to this, but it's usually somewhere around the 150,000 km mark. 

Value of the vehicle - Depending on how much the vehicle is worth relative to how much you still owe on it with your current auto loan, you may not qualify for a refinance. More specifically, if the car is worth less than what you still owe on it, you will likely have a tougher time finding a lender who will offer you a refinance. 

Loan amount - Lenders typically have a minimum loan requirement that they work with when it comes to refinancing an auto loan, so you'll need to inquire about what that number is when you apply. 
What You Need to Refinance a Car Loan

In order to refinance an auto loan, you will need to gather the following documentation:

  • Information about your current auto loan, such as your lender, account number, and the outstanding loan balance
  • Information about your vehicle, such as the year, make, model, and a vehicle identification number (VIN)
  • Documentation proving your ability to pay back the loan, such as your pay stubs or tax returns.

When Is Refinancing a Car Loan The Right Option?

Before you decide to refinance your auto loan, consider the reason why you are thinking of taking this route. Here are some sound reasons why refinancing your existing car loan could be the right option:

To get a lower interest rate - If rates have dropped since you first took out your car loan, then you may want to consider refinancing in an effort to get a lower rate and save money over the life of the loan. This is one of the biggest reasons why consumers refinance, as they can potentially save thousands of dollars in the long run. Even a 1% dip could translate to a significant amount of money saved. 

You're in a better financial situation - If you have a higher income, less debt, and your credit score has improved, you may want to refinance your loan in order to get better terms, which your lender may be open to based on your improved situation. 

You’re finding it difficult to keep up with your bills - On the other hand, if you're having trouble paying your bills every month, refinancing may still be a good idea if it means getting a lower rate and easing your debt burden. Even if you can't get a lower interest rate, you may still want to refinance in order to extend the length of the loan so your payments are lower and you have more time to pay off the balance. 

You want to add or remove a co-signer - If someone cosigned on the loan when you initially took it out in order to help you get approved, refinancing can help to remove that individual if you no longer need their financial assistance. On the other hand, if you find yourself requiring help, you can have a co-signer added by refinancing into a new loan with new terms, including the addition of a co-signer. 

When Should You Avoid Refinancing Your Car Loan? 

While refinancing an auto loan has its benefits, it may not always be the right option for you. Here are some situations when refinancing should probably be avoided:

The majority of your existing loan is paid off - If you're close to paying off the entire loan amount on your current car loan, then why refinance? Interest is typically loaded at the front of the loan, which means that you pay more of it off at the start of your loan. Waiting too long to refinance your loan means fewer savings on interest.  

Your car is too old or has too many kilometres racked up - As mentioned earlier, many lenders might not even approve a refinance on a car that is old.  

The fees are too high - Refinancing does not come without its fees, which is why you need to consider them before you opt for a refinance. If you find that the fees outweigh the perks of refinancing your loan, then this might not be the best option for you.

You're trying to boost your credit score - The main purpose of refinancing a car loan is to get a better loan and save on interest. Car loans for people with a poor credit profile are usually more expensive. If you’re currently dealing with bad credit or are in the process of improving your credit, you should wait until you see an improvement. A healthier credit score will increase your chances of approval.

Choosing a Lender to Refinance With

You may want to first consider refinancing your car loan with your current lender if you are happy with the service you are getting. If your payments have been made on time and in full every month, your current lender will likely be open to refinancing your current loan. Otherwise, there are plenty of other lenders who can offer you the terms and rates that you are looking for.

Just keep in mind, when choosing a lender to refinance your car loan with, that if an offer seems too good to be true, it likely is.