Can you refinance your car loan?

Interest rates fluctuate all the time, including the ones for car owners. If you've purchased a new vehicle in the last couple of years, your monthly payments may not suit your current lifestyle. Luckily, like other types of loans, you are able to refinance your car loan. But in certain scenarios, auto refinancing may not be the best move. Stick around to learn whether refinancing your existing car loan makes sense for your finances and interests below.

What is car loan refinancing?

Auto refinancing involves applying for a new loan to pay off your current one. Typically, refinancing a car loan comes with a favourable interest rate, loan term, and monthly payment.

Why should I refinance my auto loan?

In a lot of situations, refinancing a car loan can benefit your finances in the long term. However, whether or not you should seek to refinance your current auto loan depends on your financial situation. Here's a closer look at when you should and shouldn't consider this option:

When refinancing a car loan makes sense

The interest rate has dropped: As we said, interest rates fluctuate all the time. If the current interest rate is at least 2% lower than your current one, auto refinancing could help you save money on your monthly payments.

Your credit score has improved: If your credit score has improved since you originally took out your car loan, refinancing makes sense, given that you could potentially save with other lenders.

You want to lower monthly payments: Making regular payments on your auto loan is a commitment. If your vehicle loan payments are too expensive and your financial situation has changed, it's possible that with a lower interest rate, you could get a lower monthly payment as well, which can give you a bit more room when it comes to your plans for spending and saving throughout the year.

When refinancing a car loan doesn't make sense

You've almost paid off your car loan: If your current car loan is almost paid off, an auto refinance doesn't make sense. Typically, loan refinancing should be done within the first year or two of the loan term.

You drive an older vehicle: Cars depreciate over time, meaning they lose their value. If you're driving an older vehicle, refinancing your car loan may not be possible. Some lenders won't refinance auto loans if the vehicle is over a certain age or has a specific mileage on it.

The additional fees outweigh the benefits: Paying off your original loan with your new loan before your term ends could lead to prepayment penalties. In some scenarios, these penalties will outweigh the money you'll save on your car loan payments, making it not financially worth it.

How to refinance an auto loan

Refinancing your car loan can get confusing, but by following their step-by-step, you'll hopefully be saving money on your monthly payments in no time:

1. Review your existing loan and monthly payments

First things first, before refinancing your car loan, you'll need to review your original loan and pay attention to the following information:

• What your current monthly payments are.

• The annual percentage rate (APR) of your current loan.

• How many months there are remaining in your repayment period.

2. Calculate the value of your vehicle

As your car value depreciates, there's a possibility that the value of your car is significantly lower than your existing auto loan, indicating that you have negative equity. In this scenario, you won't be able to refinance your car until your equity becomes more than what is owed on your original loan unless you have a good credit score.

If you do have negative equity in your car, the best thing you can do is continue to make your monthly payment on time. If your financial situation allows, you may also want to consider putting more money down each month.

Now, when it comes to determining the current value of your vehicle, there are several calculators online that you can use that take into account your vehicle make and model, age, mileage, and other factors.

3. Get a credit check

The next thing you need to do is get a free credit score check to determine where you currently stand. You can pull your own credit report online or through your banking app. It goes without saying that there's a certain level of importance for a credit score when financing a car or a car loan in this case.

Like all types of personal loans, making your interest payments on time each month can help increase your credit score and look good on your credit history. If you've done so over the past year or so, you can expect your improved score to help you secure an auto refinance with a lower interest rate.

On the other hand, if your credit score isn't where it needs to be, build your credit with KOHO by applying for a virtual credit card to help fund your online purchases with ease. To avoid missing a monthly payment, consider overdraft protection coverage. You'll even get a cash advance of up to $250 when you sign up for free!

4. Gather your refinancing documents

Generally speaking, the documents you'll need to get a car loan in Canada will vary between lenders. However, at the very least, you'll need to get ahold of the following before you begin shopping for different lenders:

• A valid driver’s license.

• Your vehicle registration.

• A copy of your car insurance.

• Your car's vehicle identification number (VIN).

• Proof of employment, such as pay stubs.

• Your social security number (SIN).

• Your current car loan contract.

5. Shop around and compare auto loans and interest rates

Now, you can begin looking for a lower interest rate with a new lender. We recommend comparing interest rates from at least 3 to 4 lenders. If possible, consider getting a soft-credit check to get pre-approved for your loan and more information about what your lower interest rate will be and your repayment period. Unlike a hard credit inquiry, a soft credit report won't impact your current credit score.

An auto refinancing calculator is also a convenient way to compare interest rates for different auto loans quickly and compare them to your monthly budget. Additionally, pay attention to the loan term. Ideally, when refinancing your car, extending your loan term isn't recommended, given that you'll pay more interest each month. If you can afford to pay your loan faster with a shorter loan term, do so, as it will save you money in the long run.

6. Apply to refinance your car loan

Once you've found a new car loan with an interest rate that is lower than the one with your current lender, you can go ahead and begin the application process. If you've already gotten a pre-loan approval, this process won't take long.

Once approved, the loan amount will be deposited into your bank account. With the funds, you'll then be able to pay off the loan with your current lender.

Will refinancing a car loan hurt my credit score?

Refinancing your car loan won't hurt your credit as long as you continue to make your monthly payments on time. Just keep in mind that many lenders tend to run a hard credit inquiry when you first apply for a loan. Doing so may lower your credit score by a couple of points. That said, this decline is only temporary and should be back up to normal once you begin making your first couple of payments toward your new car loan.

Can I get a car loan with bad credit and no co-signer?

Getting a car loan with bad credit and no cosigner can seem like a pipe dream to a lot of Canadians. But it's possible. There's no denying that your credit score is considered heavily when applying for an auto loan. However, there are bad credit car loans and online lenders that specifically cater to those with less than favourable credit scores.

That being said, because you have a low credit score and no co-signer for the auto loan, you may be setting yourself up to pay a high interest rate, limited vehicle options, shorter repayment periods, and other issues. Ultimately, when determining whether a car loan with bad credit is worth the investment, you'll want to consider your current finances, monthly bill payments, and whether you can take on more debt.

What credit score is needed for a car loan?

So, what credit score is needed for a car loan? The minimum credit rating required for a car loan in Canada varies by financial institution, credit union, and online lender. Traditional financial institutions typically have a greater minimum requirement than those who lend online.

Generally speaking, the average credit rating required for a car loan from a bank or credit union fluctuates between 600 and 650. Online vehicle loan lenders may have lower credit score prerequisites. However, online lending comes with risks like high interest, hidden fees, and short repayment terms.

If you do decide to apply for a car loan online, make sure you review the lending company beforehand and read the terms and conditions of your loan agreement.

Is a 746 credit score good or bad?

If you're looking at your current credit rating, and it's sitting at 746, you may be wondering, "Is a 746 credit score good or bad?" The average credit rating in Canada is approximately 680, according to TransUnion. So, rest assured, if you have a credit score of 746, you've got a score that's considered very good. In fact, a lot of Canadians who are trying to improve their scores aim for something in the 700 range. Keep doing what you're doing, and you can improve your score even more!

Why is a good credit score important when applying for an auto loan?

Your credit score reflects your credit history and your ability to borrow and pay back money responsibly. In this case, having a good to excellent credit score will help you when applying for a car loan in terms of interest rates, loan terms, and more.

What a bad credit score means

Now, let's say you have a bad credit score. What does it mean? You can think of your credit score like a school report card. The higher your score, the better you're handling your debts. The way lenders see it, a bad credit score means that you're risky to lend to, given that your score reflects an inability to borrow money and pay it back on time. In other words, you're unable to spend responsibly.

What affects your credit scores

So, what affects your credit score? The truth is that there are numerous factors credit bureaus take into account when determining your credit rating, and not all of them are known. That said, common factors that are known to make an impact include:

• Your ability to make monthly payments on time.

• How long your credit history is.

• Your debt-to-income utilization ratio.

• How much available credit you're using each month.

• The types of credit you have.

• And more.

Recognizing what influences your credit score can help you take the initiative to improve it. Make sure you're monitoring your score regularly, paying your bills on time, and spending wisely.

Are there other ways to finance a car purchase?

If you don't want to take out a traditional car loan to fund your new ride, there are other ways to finance your car purchase. Rather than opting for a car loan, you can choose a personal loan instead. Personal loans aren't secured, meaning you won't need to put down collateral in the event you default on the loan. Depending on your credit history and bank, you may also be able to obtain a more favourable interest rate this way.

You can also consider a line of credit. Credit lines work similarly to a credit card in the sense you spend up to your credit limit and only pay interest on the amount you borrow.

Alternatively, you may also want to consider leasing your vehicle. While you won't technically own the car, leasing is a great option if you want to drive a newer model vehicle with less expensive monthly payments.

Can I Save Money Buying An Electric Vehicle?

If you're thinking about opting for an electric car as opposed to a gas model, you may be wondering, "Can I save money buying an electric vehicle?" While electric cars tend to have higher market prices, you can qualify for provincial rebates and other incentives to make the switch to a more environmentally friendly ride.

Note that rebates and initiatives will vary between provinces.

How to build credit with a secured credit card?

Building credit throughout your lifetime and establishing a healthy credit history can help you long-term if you want to borrow money for significant purchases like a new home or vehicle. If you've considered taking on new debts, you may be wondering how to build credit with a secured credit card.

What makes secured credit cards different is that they require users to put down a security deposit on their card. This deposit serves as your credit limit, preventing you from spending anything over this. If you have poor credit and bad spending habits, this type of card can be beneficial. Just make sure to remain within your credit limit and pay your monthly bills on time, and you can slowly improve your overall score.

Build your credit with KOHO

Looking to build your credit and make money on the funds you save? KOHO can help! With high-interest savings and several credit-building products, KOHO helps everyday Canadians take control of their finances. If you're interested in learning more, reach out to KOHO today to speak with a representative or apply for your new card online!