Refinancing a Car Loan in Canada

Car loans have been a popular way to finance a vehicle in Canada for years. Statistics show that over 12% of Canadians plan to take out a car loan in the first quarter of 2023, a 1% increase from 9% in 2022.

Like anyone around the globe, however, Canadians go through a long-term budget arrangement and find new ways to save. If you’re in the same situation, you can refinance your car loan and give yourself breathing room.

Refinancing a car loan means taking out a new auto loan with better and more favourable loan terms to repay your current loan. It’s like repurchasing your car without negotiating prices, as you’re already the owner. 

You can use the newly acquired loan to pay off your old car loan and any early repayment fees charged by your lender. Then, from the remaining balance, you can make regular payments on your new car loan as agreed.

To understand whether car refinancing is the right choice, you must learn the options available. With the help of this article, you can make informed decisions and pick the refinancing arrangement that suits your financial situation.

???? Key Takeaways:
  • Car loan refinancing means taking out a new auto loan with better and more favourable loan terms to repay your current loan.
  • To refinance a car loan, you need documents like a recent tax return, vehicle information, banking information, government-issued ID, pay stubs, etc.
  • In-depth research on the due process and guides to follow during car loan refinancing will prevent complications.
  • Car loan refinancing has great benefits if done for a good reason and when you meet all the conditions.
  • Conversely, refinancing can be a terrible financial decision if done incorrectly.

Documents Needed in Car Loan Refinancing in Canada

Refinancing a car loan requires a lot of documentation before starting the application process. Typically, you can request these documents from those who initially issued them.

Below is the documentation needed to refinance your car:
  • Recent tax return information
  • Three months of pay stubs from your employer
  • Banking information or void cheques for a pre-authorized payment agreement
  • A government-issued photo ID, a driver’s license, and a passport 
  • Vehicle information (must include the year, model, trim, mileage, and title)

These vital documents are essential to speed up the process and develop a better rapport with the lender.

Steps in Car Loan Refinancing in Canada

Conducting thorough research on the due process and following guides during car loan refinancing is essential to avoid complications.

Now that you have the list of requirements, here’s a guide on how to start refinancing your car loan in Canada:

1. Review your current car loan payment agreement, like;  interest rates, remaining loan balance, loan term, early repayment fees, and other vital details to ensure it’s worth it.

2. Check the value of your car, as it will determine how much you need to borrow and whether refinancing your auto loan is viable.

3. Check your credit score and debt-to-income ratio, current loan amount, and vehicle will all play a role in whether your application to refinance your car loan is approved. 

4. Research different lenders and compare your car loan refinancing options for the best offer.

5. Apply for a car loan pre-approval to see what rates and terms you might qualify for before completing a full application.

6. Review your pre-approval offers by calculating your new monthly payment to see if you’ll save money by refinancing. Also, compare your new loan against the terms of your old one to see if refinancing is worth it. 

7. After reviewing the application, the next step is to submit it to the lender and sign your loan documents to finalize the agreement. 

8. Finally, pay off your old car loan. Your new lender will either pay it off directly or transfer the funds to your account so you can pay it off yourself.

Pro Tip:

Timing counts. If you have your car loan for three to four years, you may be in the sweet spot for refinancing. Lenders prefer it when the resale price of your car is greater than what is owed on the loan.

Benefits of Refinancing: Is Refinancing a Vehicle a Good Idea?

When people hear about refinancing a car loan, the question of whether refinancing is a good idea always comes to mind. Some have this fear that car loan refinancing might worsen their financial situation.

However, if you meet these conditions, be assured that car loan refinancing is an excellent financial decision for paying off your loans, seeing these great benefits.

Refinancing is a good idea if:

1. You didn’t get a good loan term. Your previous lender might have cheated you during your loan application. However, through car loan refinancing, you can get a favourable loan offer with better loan repayment terms with the new lender.

2. You want to remove a cosigner. Through auto refinancing, you have the choice of changing or removing your cosigner. 

3. You want to work with a different lender. The easiest way to change your lender is by refinancing your auto loan.

4. Your interest rate is very high. Refinancing your car loan from another lender can help get you better and more favourable loan terms and lower interest rates.

5. You want to get extra cash.  Through car loan refinancing, you can get extra money from the new loan even after paying off your old car loan.

Disadvantages of Refinancing

Refinancing can be a good idea, but sometimes it isn’t, as it can also have drawbacks. Thus, it can be disadvantageous to you if poorly thought out. 

Here are a few downsides: 

1. You might have to pay fees. Lenders charge an early repayment fee before you can break your current car loan contract to refinance your car loan. These fees can be high, thus adding to your financial burden.

2. You could wind up upside down. Refinancing leads to extending your loan term, resulting in more interest paid.

3. Your credit score might get affected. Refinancing a car loan lowers your average age of accounts and increases your credit utilization ratio. The major credit bureaus figure you wouldn’t apply for a loan if you were financially capable.


There’s no legal limit to the number of times you can refinance your car loan or how often you can refinance.

When You Should Not Refinance Your Car Loan

There are some situations when refinancing an auto loan is not advisable. They include:

  • Don’t go for auto loan refinancing if your car loan duration is almost up. Refinancing should not be an option if you have less than a year to complete your loan payment.
  • Refinancing is not advisable if the prepayment fees you must pay to refinance your car outweighs the benefits.
  • Refinancing is not a good idea if you plan to sell your car soon.
  • Refinancing is out of the question when your car is not working well, and its value is less than your loan balance.
  • Some lenders will only refinance cars over a certain age or mileage to avoid borrowing money on a vehicle that might have little value.
  • If you want to apply for more credit soon, you should hold off on an auto loan refinance to keep your scores as high as possible and maintain your approval chances.


Refinancing an auto loan is a sound financial decision that can save you extra money and offer you better loan terms. However, it should be taken when the circumstances are right.

It would be best to talk to a professional to help you decide if refinancing is the best choice. Ensure you consider all your options and current financial situation before applying, as there are consequences if due diligence is not done. 

FAQs on Refinancing a Car Loan in Canada

Where can I refinance my car loan? 

You can refinance your car loan through a bank, credit union, or auto lender. Many auto lenders in Canada offer auto loan refinancing. Investigate and compare different lenders to find the optimal rate.

Is it expensive to refinance a car loan?

Refinancing an auto loan can be expensive if you are to pay high repayment fees for the previous loan.

Will refinancing my car loan affect my credit score? 

Virtually everything that you do financially impacts your credit score in one way or another. Refinancing impacts your credit negatively, but it is both short-lived and minimal. 

To avoid taking a hit on your credit score, consider applying for pre-approval before you decide on a lender.

Can I refinance my car if I have bad credit? 

Some lenders are willing to approve car loans for a client with bad credit but with less favourable loan terms. So consider the offer to see whether it is worth entering into the arrangement before deciding. 


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