Dos and Don'ts of Refinancing Your Car Loan
Posted on October 7, 2024
Canadians love their cars and often use loans to buy them - about 85% of new cars in Canada are bought with loans. But borrowing money for cars can be expensive, so many Canadians end up refinancing to save money at some point.
There's plenty of information available about refinancing. But don't worry - it's not as complicated as it sounds, especially when it comes to car loans. Once you get the hang of your choices, you can make things easier and even cut some costs on your car loan.
Today, we'll cover the key dos and don'ts of refinancing your car loan to make it easier for you. This guide has you covered with all the answers you need, so you can really get a grip on what's what with your options.
How Does Car Loan Refinancing Work?
Refinancing your car loan is kind of like hitting the reset button on your car payments. It's not about negotiating the car's price because you already own it; instead, you're just settling the remaining balance on your loan.
Here's how it goes: When you decide to refinance, the lender checks your credit and if your car meets the financing criteria. If you get the thumbs up, they'll offer you a new loan for the amount you still owe and use it to clear out your old loan.
Can I Refinance My Car Loan?
Wondering if your car loan can be refinanced? Just like with your current loan, you'll need to meet certain qualifications. Each lender has similar criteria, though they may use slightly different methods. Generally, you'll need:
- A verifiable source of income.
- Financial flexibility to manage payments (known as a debt-to-service ratio).
- A minimum credit score and credit history.
- A legal residence where you receive mail.
Preparing For an Auto Refinance
Thinking about refinancing your car? Well, before you jump in, you must understand the dos and don'ts. Let's talk about what you should and shouldn't do when it comes to auto refinancing.
1. Dos in Auto Refinancing
Let's begin by exploring the dos in auto refinancing:
Wait for a Minimum of 6 Months
Timing is everything when it comes to refinancing your car. Waiting around six months to a year is your best bet before making any moves. While you wait, just keep on top of those payments with your current lender. Doing this will make you look good to future lenders and give your credit score a nice little boost.
Make sure Your Vehicle Meets Eligibility Requirements
Before you dive too far into exploring car loan refinancing, check if your car qualifies. If it's over ten years old or has over 100,000 miles, it might not be eligible for refinancing.
Review Your Credit Score and Report
Grab a free copy of your credit report and give it a once-over. Watch out for any slip-ups like missed payments or wrong personal info that could mess with your application.
Stay Informed About Market Rates
Currently, market rates are still low. It is an ideal chance to consider refinancing your auto loan before interest rates rise. If your car loan is a few years old, you may be able to receive a better interest rate now than when you first got it.
Thoroughly Review Your Current Contract for Penalties
Make careful to read the tiny print on your current loan agreement. Is there a penalty for paying off your loan early? These costs can sometimes be rather high.
Compare Rates from Multiple Lenders
Search online for credit unions, traditional banks, and online lenders. Select a lender based on average interest rates and customer satisfaction ratings.
Discuss Options with Your Current Lender
When money's tight, reaching out can be a game-changer. Give your lender a call—they might offer deferrals, waive penalties, or suggest other ways to help out when you're facing a rough patch.
Verify Your Credit History
Your credit score is crucial in establishing how excellent your refinancing interest rate might be. If it has improved since you received your initial auto loan, you might be eligible for a lower APR on your refinancing loan than your original vehicle loan.
2. Don'ts in Auto Refinancing
Understand don'ts in auto refinancing:
Avoid delaying until there's less than a year remaining on your loan
You don't want to wait too long to refinance your car loan. Car loans are front-loaded, amortized loans. This implies that at the beginning of your loan, most of your payment goes toward the loan's interest. As the repayment time passes, you will contribute more and more to your principal.
Refrain from applying for refinancing if your loan is underwater
If you owe more on your car than it's worth, which is called being "underwater" on your loan, getting a refinance will be tough.
Avoid submitting multiple applications for refinancing
When you apply for loans, your credit record will be reviewed. The result of this query will appear on your credit record for about one year. However, numerous difficult questions might add up and lower your overall grade.
Don't wait
Refinancing is all about striking while the iron is hot. Right now, the iron is red hot. If you feel interest rates will fall soon, do not delay refinancing. They probably won't. Instead, get your ducks in order and apply for refinancing sooner rather than later.
Ensure not to overlook the calculations
If there are prepayment penalties, you should sit down and do the math. Will refinancing be worthwhile? Calculate how much you can save with a reduced interest rate or a shorter payment schedule (or both) and determine if the benefits outweigh the penalties.
Refrain from hastily committing to a deal
Take your time before committing to a deal. Don't rush into accepting the first offer you receive. Instead, gather all the offers available to you and carefully consider each one. Pay attention to important details such as:
- interest rate
- repayment period
- potential prepayment penalties
- lender's reputation based on customer reviews
Avoid extending the loan term.
The longer you stretch out your loan, the more interest you'll end up shelling out in the long run. It might seem tempting to only think about cutting down your monthly payment, but you must find a sweet spot that saves you the most cash when refinancing your car.
Don't immediately accept the initial auto refinance offer
Every lender has its own technique of assessing risk and will most likely make various offers. By receiving many offers, you will have a choice and may select the best offer for you.
Avoid refinancing a car that exceeds your budget
If a refinanced auto payment is still too much for your budget, try trading in your car for a less costly one. Here's a guide for deciding whether to trade in or refinance your automobile.
If you owe more than your car is worth, negative equity might make refinancing difficult. It may be better to pay off the loan sum before proceeding.
Benefits Of Car Loan Refinancing
There are a few key reasons why refinancing your car loan can be a better move:
1. Lower Interest Rates
If your credit score has improved since you first got your loan, you might qualify for a lower interest rate. Even a slight drop in your interest rate can add up to big savings over time.
2. Extended Loan Terms
Refinancing can also give you the option to extend the length of your car loan, which can lower your monthly payments. While this means you'll pay more in interest over the life of the loan, it can help make your payments more manageable.
3. Change Loan Terms
If your original loan required a co-signer, refinancing could allow you to remove them from the loan. Similarly, if someone else financed the car for you originally, refinancing can help transfer the loan into your name.
Overall, refinancing your car loan can save you money and make your payments easier to handle.
Find Out How to Refinance Your Car Loan the Right Way
When it comes to choosing a refinancing company, the process can feel overwhelming and time-consuming. We at CarHub understand the difficulties of this process and what lenders look for to provide the most favorable offers.
With established relationships with reputable lenders, we leverage our connections to secure you the most favorable loan terms. It's as simple as that. Visit CarHub now.