Car Loan Refinancing: How to Drive Down Your Payments

Car Loan Refinancing: How to Drive Down Your Payments

Posted on April 24, 2023

Car loan refinancing is a common tactic to improve your finances or position in one way or another. Technically there isn't a single best time to refinance an auto loan. It isn’t a universal benefit and it won’t work in every situation but there are times when it makes perfect sense.

In this article, we outline some common situations where car loan refinancing makes most sense in Canada.

When your Credit Score has Improved

Having improved your credit score is when you can definitely benefit from refinancing an auto loan.

That’s especially true if you have gone from bad credit to good credit. If you have a bad credit car loan and can now apply successfully for a standard loan, there are significant interest savings to be made.

Even if you don’t have a bad credit car loan, going from a good rating to excellent can also save you a few points. The savings may be more modest but they can still add up, especially for longer loans.

When Base Interest Rates Drop

Canadian interest rates have been fairly steady recently but if that changes, it could be a good time to refinance. Borrowing high and paying low is a good way to lose money.

If you got your car loan while rates were high and they have now dropped, refinancing could save you a few hundred or a few thousand dollars over the loan term.

As long as you don’t face early settlement fees, it could be enough to make refinancing worthwhile.

You Need Lower Monthly Payments

Needing to lower your monthly payments is another common reason to refinance an auto loan. Whether that’s because you need to or want to save for something else, you have options.

You could go longer to reduce the payments without impacting the type of car you get. You get a smaller loan, depending on how much you have paid off, to lower payments.

Which you choose depends on how far into the loan you are and how much you have paid off.

You Want to Pay Off  the Car Loan Faster

While less common, refinancing an auto loan for a shorter period of time with higher payments is a good reason to do it. We see these fairly regularly when someone gets a raise or an improvement in circumstances.

You can refinance for a shorter term with higher payments and pay the loan off over 3 years instead of 5 for example. It’s more expensive to pay but will get the loan settled much faster. Click here for some other great ways to pay off a car loan faster.

To Remove a Co-Borrower or Co-Signer

If you borrowed with an ex-partner or used a cosigner and no longer need them these can be good reasons to refinance the auto loan.

Removing a co-borrower does require their agreement to remove them and ownership of the car, but is definitely possible.

Removing a cosigner is also possible as long as your credit score is sufficient to qualify for the amount you want to borrow.

Downsides of Car Loan Refinancing

There are also downsides to financing a car loan.

Pay more interest over the term – If you refinance over a longer term to lower payments, you’ll be paying more interest over the term. Sometimes, substantially more.

Loan fees – Most car loans we work with don’t include high fees but some will. Some loans will also come with early settlement fees. All of which can add up and is money you won’t get back.

Higher interest rates – Sometimes, borrowing less can cost you more in interest. Lenders tend to offer lower rates for higher amounts because they end up making more overall. Shorter loans or lower amounts often means higher rates so the lender makes their profit.

When you’re ready for a car lease or loan, get in touch with the auto loan experts at Northway Ford for great deals on auto finance.