Updated: Aug 17, 2021
Refinancing your auto loan in Canada gives you the advantage of lower interest rates that saves you a huge amount of money on your monthly repayments. Safe Lend can help you to extend the terms on your loan so that monthly payments are more easy and affordable.
This blog has all the information and answers related to your Refinancing auto loan queries in Canada. So, let’s begin without wasting any time.
How does Refinancing Auto Loan Work
The Canadian auto loan refinancing process involves borrowing the money to pay off your old loan. Most people will refinance their car loan only if then they believe it will result in a lower interest rate. Refinancing might be a good idea if your credit score has improved or you are earning more than you used to.
A refinance involves getting a loan through an entirely new lender (or reducing your rates with your current lender if they're considering it).
You can pay off your old loan with the money you borrow plus any closing costs and early repayment fees. Once you have your new loan, you can begin making regular payments to save money.
Let’s check which documents are needed for auto loan refinancing in Canada.
Documents Needed for Auto Loan Refinancing
Chances are you already have the vast majority of information for refinancing an auto loan since it is similar to making a car purchase. Make sure, however, that you are approved for a refinance before you jump.
Take a look at your lease history to determine whether or not you have defaulted on it. If you are refinancing, make sure your credit score is stable, and your working situation is stable. After confirming your eligibility for the loan, the next step will be to gather your documents.
Your most recent tax records will be requested, so bring them. Also, your employer must provide three months' worth of pay stubs.
Don't forget to bring your banking information. People often rely on void cheques in order to speed up the process and eliminate errors.
Additionally, you will be required to present appropriate identification. There are two forms of identification required: a government-issued photo ID and a second identification. Passports and driver's licenses are both acceptable forms of identification.
Make sure you provide all the necessary details about your vehicle. For this purpose, registration documents are ideal.
You can speed up the process and earn a better rapport with the lender by ensuring that you have all the necessary documentation. Preparing ahead of time allows you to present all reasons for refinancing in an organized way. Now, let’s look at the Auto Loan Refinancing process in detail.
Process of Refinancing Auto Loan
Vehicle refinancing is a relatively simple process. The process is similar to the original purchase. Basically, the new lender will buy your debt (pay for the car's remaining value) and then lend you the money. Typically, this will be at a lower interest rate and for a longer or shorter period of time.
You should approach the lender before refinancing a car loan to find out what interest rates are available, along with any fees that will be associated with it. Discover if there is a penalty for refinancing, and find out how long the new loan will last. Examine both the short- and long-term costs of refinancing. It is then up to you to determine if it is compatible with your financial situation.
Here, we will discuss the steps involved in the process of refinancing auto loans in Canada.
1. Examine Your Existing Auto Loan Plan
Log into your account or consult your loan statement for the following information:
Repayments in monthly instalments
The interest rate currently in effect
The remaining balance
The remaining loan term
Penalty for prepayment, if any
Contact information for the lender
If you're going to pay off your loan early, consider any fees you'll be charged against any savings you could expect from refinancing your auto loan.
2. Get an Estimate For Your Car
Refinancing can be a viable option if your car's current value is sufficient to allow you to borrow enough to make payments. Check out sites like the Safe Lend to see what your car might be worth. Several factors determine your vehicle's value, including its make, model, mileage, condition, and location.
You could end up paying much more for your car than it is worth if your car is worth less than the amount you want to borrow. Alternatively, it might be less expensive to sell it privately or trade it in at a dealership.
3. Verify Your Eligibility and Creditworthiness
You may be approved for refinancing based on elements such as your credit score, debt-to-income ratio (DTI), and current loan amount. Find out which lenders might be a good fit for you by checking your credit score and computing your DTI ratio online.
Often, refinancing providers will refinance a loan for no less than $5,000, or even more. The lender won't approve your application if your current car loan is less than their minimum. As a secondary measure, lenders also place limits on the age and mileage of the vehicle: An older car or one that has more than 100,000 kilometres will be more difficult to refinance than one with fewer miles.
To avoid rejection and a hit to your credit score, review the eligibility criteria before applying with each lender.
4. Explore your Refinancing Options for an Auto Loan
If you want to refinance your car loan, research lenders to see if you meet eligibility requirements and how much you might be able to borrow. If you are comparing your options, make sure to consider the cost, the term, and the changes to your monthly payment schedule with your new loan.
5. Request Pre-approval
There are some financing companies that offer pre-approval, which lets you see what terms and rates may be available before completing an application and hurting your credit score. Usually, you can download a pre-approval form from the lender's website, and you can get an idea of possibilities within minutes.
6. Re-evaluate Your Pre-approval Offers
After you receive a pre-approval offer or two, calculate your new monthly payment to understand whether the refinancing makes financial sense. Be sure to take into account outside factors like discounts and perks to get the best deal.
It is important to compare the terms of a new loan with those of your old loan. Refinancing may not be worthwhile if you had a prepayment penalty on your previous car loan or had a higher interest rate on the new car loan.
7. Submit the Complete Application
Reach out to that lender to send in a full application once you decide on a lender. Upon approval, read your new loan documents carefully to ensure you understand the lender's conditions. Be sure you understand and know your new payment due date, interest rate, loan term, and any possible fees. Once you've agreed to the terms, sign the loan documents to complete the process and submit the complete application.
8. Get Rid of Your Previous Car Loan
You will either be paid off directly by your new lender, or you will be able to pay it off yourself by transferring funds to your account. No matter what, it is a good idea to contact your old lender to make sure the payment was processed, and the account was closed to avoid future headaches.
Now that you have applied for refinancing your auto loan let's take a look at the 3 reasons that how Auto Loan Refinancing can help you.
How can Auto Loan Refinancing Help You?
Auto loan refinancing can help you in the following 3 ways
1. Extension of the Loan Term
The refinance process may allow you to reduce your monthly payments by extending the duration of the loan. Considering this has the effect of increasing interest, but if you are aiming for a smaller monthly payment, this may still be worth it. Lower your monthly payments. You can extend your loan term to reduce your monthly payments if you have trouble paying them back. Refinance your auto loan for a higher amount than what you owe on it and get cashback.
2. Reduced Interest Rates
It is possible to refinance your car loan at a lower interest rate regardless of whether you had bad credit or good credit at the time of your original term.
It may seem insignificant, but even a small decrease in interest rate can save you thousands over the course of a few years.
Reduce your interest rates. By refinancing with good credit, you can lock in lower interest rates, so you pay less over time.
3. You can remove co-signers or add payees
Refinancing could mean getting rid of a co-signer if you had to find someone to consign the original loan. If the loan was for a non-qualified buyer, say parents buying a vehicle for a teenager, the terms could be changed so that the loan is now in the teen's name.
Refinancing Auto Loan - Is it Better to go for a longer or Shorter-Term.
There are key factors to consider when refinancing. A key factor to consider is the new loan's term. In the long run, you will be charged according to the duration of the agreement. A shorter loan's payments will be higher each month, but its term will be shorter. As a result, you pay less interest over time.
On the other hand, monthly payments are smaller for longer-term contracts. Nevertheless, you are not guaranteed a lower price in the end. Compared to short-term loans, long-term loans compound interest more slowly. As a result, you pay a much higher price for your vehicle than you would if you leased it for a shorter period of time.
There are other aspects to consider before choosing the term of the loan for your household.
1. An Overview of the Financial Situation
Ensure that you can commit to making payments and that the amount you can afford is reasonable. Think about how much you are willing to cut back on spending if that means paying off the loan faster. Also, consider whether you might be able to get a better rate. In general, if your credit has improved since your initial agreement, it should be fine to proceed.
2. Renewing Loan Terms
Long-term loans cost more in interest because they are paid out over a longer period of time. You may be able to discharge the loan faster depending on how well you can meet your regular repayments. Likewise, refinancing makes sense if you are struggling with your mortgage payment and haven't found a long-term solution yet.
3. Payments Every Month
If you choose to extend your term, your monthly payment will likely be lower with a refinance. This will result in you paying more over time. A short-term mindset is easy to adopt during financially challenging times. Nonetheless, you must consider your long-term goals, both in terms of your finances and your credit score.
4. An overview of the Interest Rates
When refinancing a loan, the goal is typically to lower the interest rate. Taking advantage of a new lower interest rate is not the only solution when you extend your loan term significantly. If your loan term is extended too long, you may end up paying overtime more than you originally did to borrow. To compare the arrangements objectively, ensure that you have the real numbers for the total you will pay before making a decision.
We have been talking that good credit is necessary for refinancing an Auto loan in Canada but let’s see if you can refinance a car loan with bad credit.
What if your Credit Score is Bad? Can you Refinance a Car Loan?
If you have bad credit, you can refinance your car loan, but you must be sure it's the right choice for you financially. The only time you are eligible is if your credit rating has improved since you first applied for a car loan (even if you still have a score under 650). In addition, refinancing with bad credit could make sense if you have a high income or have paid off significant debts.
When you are having trouble making your current monthly payments, you might consider refinancing with bad credit. It is possible that you can refinance for a longer-term, which will result in a lower monthly payment. Remember that unless you also manage lower interest rates, you'll end up paying more in interest over time.
If you are thinking about refinancing your auto loan in Canada, then try contacting Safe Lend for better and amazing auto loan refinancing options.