Refinancing a Car Loan Canada: When Does It Make Sense?
Updated: 10 hours ago
Refinancing a car loan means taking out a new loan to pay off the one you have now. The vehicle stays with you; the loan changes.
Whether it makes sense depends on the total you would pay. The Financial Consumer Agency of Canada says lowering a car payment usually involves extending the term, and that you may end up paying more interest.
Picture a commuter heading down Highway 7 from Lanark County each morning in a pickup still on the loan they signed when their credit or circumstances were weaker. If that is you, here is what to check in Ontario before you sign a new one.
Key Takeaways
Refinancing replaces the loan, not the vehicle. Compare what you still have to pay on the loan you have with the total of all payments on the new one, fees included.
A lower payment that comes from a longer term can cost more in the end.
Ontario's consumer protection law and the federal Bank Act give borrowers the right to pay out the loans they cover early, without a prepayment charge; which rules apply depends on your lender.
Ask your current lender for the payout in writing, and read the new lender's disclosure statement before you sign.
If you owe more than the vehicle is worth, a refinance still has to pay out the full amount you owe.
Whether a lender will refinance a particular loan is the lender's decision.
What Does Refinancing a Car Loan Mean?
Refinancing a car loan replaces your current loan with a new one from a lender, which pays out the old loan. From then on, you owe the new lender and make payments under the new agreement.
Under Ontario's credit rules, the amount used to pay out your old loan counts as part of what you borrow under the new one, so it shows up in the new agreement's figures.
Changing the terms with the lender you already have is a separate route. The federal consumer agency says you may be able to renegotiate a personal loan agreement with your lender, and that there may be a fee for this service.
Where Ontario's rules apply, a lender that agrees to change your terms has to send you a statement of what changed.
If what you want is for someone else to take over the vehicle and the loan, Carleton Place Ford's guide to transferring a car loan to another person covers that question.
A lease works differently; see our lease versus finance guide.
Refinancing a Car Loan Canada: Who Sets the Rules?
The rules around refinancing a car loan Canada-wide depend on who the lender is. If your loan is with a federally regulated financial institution, like a bank, federal consumer protection laws apply.
If your lender isn't federally regulated, provincial consumer protection laws may apply; in Ontario, that is the province's consumer protection law.
The federal consumer agency also cautions that regulations may not apply to some independent companies that specialize in car financing.
So ask your current lender, and any new one, whether it is a bank or federal credit union or another kind of lender.
Under federal and provincial consumer protection laws, the lender has to give you a disclosure statement before the agreement is final, so ask for your copy. It explains the total cost of borrowing and other important information.
Can You Pay Out Your Current Loan Early?
Two laws give you the right to pay out early, each on the loans it covers. Ontario's consumer protection law says a borrower under a consumer credit agreement can pay the full balance at any time without a prepayment charge or penalty.
The federal Bank Act gives the same right on a fixed-amount personal loan from a bank. Which rules apply depends on your lender, so check the prepayment terms on your disclosure statement and ask your lender to confirm the payout, and any charge, in writing.
When you pay the full balance early, both laws also require part of certain charges other than interest to be refunded or credited to you.
The federal consumer agency notes that some lenders may charge a fee if you pay off a loan early, which is why your own lender's answer matters.
Start with one figure from your current lender: the payout, which is the amount it takes to close the loan on a given date. Ask for it in writing.
If the old lender registered its loan against the vehicle, the province requires it to register a discharge within 30 days once a consumer loan is repaid.
What Does a New Lender Look At?
A new lender looks at the same things any lender does: your income, your credit report and score, and the debts you already carry. On a car loan, the vehicle can be the security, so the vehicle matters too.
Whether a lender will refinance a particular loan is the lender's decision, and the rate and terms you are offered depend on what it sees.
The federal consumer agency says lenders use your credit report and score to decide if they'll lend you money and at what interest rate.
If your credit was the reason for the rate you have now, Carleton Place Ford's guide to what happens when you apply with bad credit is the place to start.
If someone cosigned your current loan, paying it out ends that agreement. A new loan in your own name depends on the new lender's approval (O.A.C.).
What a cosigner agrees to is covered in Carleton Place Ford's guide to cosigning a car loan.
Does Shopping for a Refinance Affect Your Credit?
Checking your own credit report before you shop does not affect your score. Applying is different: it can mean a hard inquiry, which can.
The federal consumer agency says that when you shop for a car loan, quotes from different lenders within a two-week period are treated by the credit bureaus as one inquiry.
It also notes that too many inquiries close together may make lenders think you are urgently seeking credit, so keep your loan applications inside that window.
How Do You Compare the New Loan With the One You Have?
Put two numbers side by side: what you still have to pay on the loan you have, and the total of all payments on the new one, fees included. Then compare the annual percentage rate, which includes certain fees, and the term.
The federal consumer agency's advice is to look at the total cost, not only the payments or the interest rate.
Carleton Place Ford's guide to in-house financing walks through comparing the total cost, not the payment.
Under Ontario's rules, the new lender's disclosure statement for a fixed-amount loan lists the cost of borrowing, the annual percentage rate, the term, each charge other than interest, the total of all payments and the prepayment rights and charges.
At a bank, federal rules require similar details in an information box, including the term, the annual percentage rate, other charges and the total of all your payments.
A small saving on the rate can disappear into fees, so read every charge line before you sign.
When Can a Lower Payment Cost More?
A lower payment can cost more when it comes from a longer term. The federal consumer agency says the longer the loan term, the lower your payments, and that you'll end up paying more in interest with a longer loan term.
It also notes that it takes longer to get out of a negative equity situation in a long-term loan.
So if a refinance lowers your payment, check whether the term got longer and whether the total of all payments went up.
If the new loan has a variable rate, the agency notes that your payments may increase if interest rates rise.
What If You Have Negative Equity?
If you owe more than the vehicle is worth, you have negative equity, and a refinance still has to pay out the full amount you owe. Stretching that balance over a longer term can leave you owing more than the vehicle is worth for longer.
The federal consumer agency notes that cars lose their value quickly, and that an insurance payout may not cover what you still owe if the vehicle is written off.
Whether a lender will refinance a loan that is larger than the vehicle's value is the lender's decision.
Ask for the payout, then find out what the vehicle is worth, before you decide anything.
Questions to Ask Before You Refinance
Ask your current lender, the new lender and yourself a short set of questions before you sign anything, and write down the answers. They show whether a refinance lowers the total you pay or only spreads it over more time.
Ask your current lender:
What is my payout figure, and for what date?
Is there any charge to pay the loan out early, and will any fee I already paid be refunded or credited?
Would you change my terms instead, and is there a fee for that?
Ask the new lender:
What are the annual percentage rate, the term and every charge other than interest?
What is the total of all payments, including the payout of my old loan?
Is the rate fixed or variable, and what are the prepayment terms on the new loan?
Will you give me the disclosure statement before I sign?
Ask yourself:
Am I lowering the payment only by adding time?
Do I owe more than the vehicle is worth?
Will the total I pay go up or down?
What If Trading In Makes More Sense?
If the vehicle itself no longer fits the way you live and drive around Lanark County, trading it in is a different way out of the loan: the vehicle goes, and the loan is paid out as part of the trade. Before you decide, find out whether the vehicle is worth more or less than you owe.
At Carleton Place Ford, we take trades of any make, whether it is paid off or not. With your permission, we get the payout from your lender and show it beside our appraisal.
Side by side, those two figures show whether the vehicle is worth more than you owe or less.
If it is worth less, the federal consumer agency's advice is to avoid trading in a vehicle while you are in negative equity.
Applying for Financing on Your Next Vehicle
If you decide to move into another vehicle, you can apply for financing on your next vehicle with Carleton Place Ford before you visit, on approved credit (O.A.C.). We can review financing options with participating lenders, subject to your consent and lender approval.
Approval, rate, term and payment depend on the applicant, lender and vehicle, and submitting an application may involve a credit-bureau inquiry. Bring a driver's licence and proof of income if requested; lender requirements vary.
We put our appraisal of your trade in writing.
At Carleton Place Ford, we buy vehicles outright, so an appraisal does not commit you to buying from us.
If you owe more than the vehicle is worth, the shortfall may be added to the amount financed, increasing the amount borrowed and potentially the total cost of borrowing. Financing is subject to lender approval (O.A.C.).
Frequently Asked Questions
Is There a Penalty for Paying Off a Car Loan Early in Ontario?
Ontario's consumer protection law says a borrower under a consumer credit agreement can pay the full balance at any time without a prepayment charge or penalty, and the federal Bank Act gives the same right on a fixed-amount personal loan from a bank. Which law applies depends on your lender, so get any charge confirmed in writing.
Can You Refinance a Car Loan in Canada?
You can ask a lender for a new loan to pay out the one you have, but whether a lender will refinance a particular loan is the lender's decision. A new lender looks at your income, your credit report and score, your debts and the vehicle.
Does Refinancing Lower Your Car Payment?
It can, but Canada's federal consumer agency says lowering a car payment usually involves extending the term, and that you may end up paying more interest. Compare the total of all payments on the new loan with what you still have to pay on the old one.
Will Shopping for a Refinance Hurt Your Credit Score?
Checking your own credit report does not affect your score, but applying can mean a hard inquiry, which can. Canada's federal consumer agency says quotes from different lenders within a two-week period are treated by the credit bureaus as one inquiry when you shop for a car loan.
Can You Refinance If You Owe More Than the Vehicle Is Worth?
Whether a lender will refinance a loan that is larger than the vehicle's value is the lender's decision. A refinance still has to pay out the full amount you owe, and a longer term can leave you owing more than the vehicle is worth for longer.
When Does Refinancing a Car Loan Make Sense?
Refinancing a car loan makes sense when the total of all payments on the new loan, fees included, comes out lower than what you still have to pay on the one you have. If the payment drops only because the term gets longer, look again before you sign.
Your agreement, your disclosure statement and your lender decide the details.
If you have questions about a trade or your next vehicle, contact our team in Carleton Place.
Visit us at 10441 Hwy 7, Carleton Place, ON K7C 0T6
Browse inventory, value your trade, apply for financing (on approved credit), book service, or contact the team.
Sales: (888)-910-3538 Parts: (888)-876-1102 Service: (877)-866-8810 Local: 613-257-3988
About the Author:
Kerry Irven is the Vice President of New and Used Automotive Operations for Heighton Automotive Group, a family-owned and operated automotive group serving communities across Eastern Ontario. Kerry began his automotive career in new-car sales, building his experience on the showroom floor and working his way through multi-store dealership operations.
With over 25 years in the automotive industry, Kerry has helped grow automotive businesses from one location with 40 to 50 vehicles in stock to more than 500 vehicles across 10 rooftops. His hands-on background in both new and used-vehicle operations gives him a practical understanding of what customers look for when shopping for their next vehicle.
Throughout his career, Kerry has always been actively involved in staff coaching and in understanding customer wants and needs, helping ensure the businesses he works with continue to adapt to what customers are truly looking for.
One of the most exciting chapters of his career has been the shift into modern automotive marketing, embracing new technology, transparent pricing, customer-first inventory strategies, and new ways to create a better vehicle-shopping experience.
Kerry has completed extensive automotive training, including certification through the Ontario Motor Vehicle Industry Council, involvement with the Used Car Dealers Association of Ontario, Canadian automotive dealer training, and multiple customer service courses.
Born and raised on a farm, Kerry has always valued family, hard work, and a practical, down-to-earth approach. Joining Heighton Automotive Group and working alongside Thomas Heighton and family, along with managing partners Kyle Lothian and Martin Gougeon, has allowed him to bring those same values into the car business. It has also allowed Kerry to continue following a simple philosophy: treat every customer exactly the way he would want to be treated.
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