Canadians are struggling financially as a result of the ongoing COVID-19 pandemic. With mass job loss and shuttered businesses across the country, many Canadians have found themselves in a financial predicament in which money may not be flowing as freely as it did pre-pandemic.
Right now, the unemployment rate in Canada is 9.4%, the highest it’s been since August 2020. It’s tough to keep up with bill payments if a regular paycheque isn’t coming in, and that includes car loans.
Fortunately, many banks have offered financial support to those who have been hit hard by the pandemic through programs such as loan deferrals, rate cuts, and refinancing.
More specifically, car loan refinancing has proven to be quite popular among Canadians looking to save money on their regular loan payments.
Why Has The COVID-19 Pandemic Affected Car Loan Refinancing?
Given the negative impact that the health crisis has had on the financial lives of most Canadians, it’s not surprising that consumer spending has declined over the past year. Many low-income consumers and those working in the industries hit the hardest by the pandemic, simply don’t have the money to spend as liberally as they did a year earlier.
The economic stress has resulted in many Canadians being unable to afford high car payments any longer. As such, many have sought to refinance their car loans in an effort to reduce their monthly payments to fit better within their budget.
This is one more way that people are looking to save money, and it seems to be working for many.
Luckily, the Bank of Canada left interest rates low, which has helped Canadians find lenders offering lower interest rates. This is an important component of refinancing as the idea is to trade in a high-interest loan for a lower-interest one in order to reduce the overall amount owing and alleviate some financial pressure. Now borrowers may be able to refinance their current car loans and secure a new contract that comes with a lower interest rate, thereby helping them save money.
How Can a Consumer Refinance Their Car Loan?
Refinancing a loan involves taking out a new loan to pay off an existing one. In the case of a car loan, you would borrow money to pay off your existing auto loan.
The goal is to end up with a car loan that is cheaper, which can happen if the rate you receive on your new loan is lower than what you were being charged on your old loan. However, you will need to be able to qualify for a better rate if lower rates are currently available.
For instance, if your credit score has drastically improved over the years and you’re earning a higher income, you may be in a position to qualify for a car loan at a lower rate.
In this case, you may be able to refinance your current car loan to pay off your existing loan and end up with a new auto loan at a lower rate. In turn, you can save quite a bit in interest over the life of the loan.
To refinance, you’ll need to apply for a new loan with your current lender, or a new lender. The money borrowed will then be used to pay off your old car loan plus any other fees, including closing costs or early repayment fees.
What Are The Benefits of Refinancing a Car Loan?
There are several reasons why you may want to consider refinancing your car loan:
- Lock in a lower interest rate. Securing a lower rate is the biggest perk to refinancing a car loan or any other type of loan. By paying a lower rate, you’ll inevitably save money that you would be paying towards the interest portion of your loan.
- Lower monthly payments. Since your overall loan amount will be lower because of a reduced interest rate, your monthly payments can also be effectively reduced, saving you money each billing cycle.
- Work with a different lender. If you’ve been wanting to make a switch to a new lender because of issues you may be having with your current one, a car loan refinance may be the perfect opportunity to do so.
What Are The Drawbacks of Refinancing a Car Loan?
Although there are benefits to a car loan refinance, there are some drawbacks to consider as well:
- Early repayment penalties. Lenders sometimes charge a penalty fee when a borrower repays their loan amount in full much earlier than the original term end date. In this case, you could be faced with an early repayment fee to pay. It’s important to factor that amount into the equation to make sure you’re actually saving money through a refinance.
- May not be possible with bad credit. If your credit score is poor, you may not qualify for a car loan refinance.
When is it The Right Time to Refinance Your Car Loan?
There are certain scenarios in which refinancing your car loan might make the most sense:
- Your credit score has improved. Perhaps the reason why you currently have a high-interest rate on your car loan is that your credit score wasn’t that great when you first took out the loan. If it’s improved since then, you may be able to qualify for a car loan at a much lower rate.
- You’re making payments on time. Paying your loan in a timely manner can show lenders that you are a low-risk borrower, in which case they may be more willing to extend a car loan at a lower rate.
- Interest rates have dropped. If interest rates on car loans have dropped significantly since you first secured your car loan, now may be a good time to consider refinancing your loan. The current pandemic has certainly played a role in helping to keep interest rates down in order to avoid any further financial hardships for Canadians.
- You’re looking to switch to a prime lender. If you’re waiting for an opportunity to make a switch to a prime lender, refinancing your car loan today may be a great time to do so.
Final Thoughts
The COVID-19 pandemic has negatively affected the entire country. For those consumers who are struggling, refinancing an auto loan could mean a few hundred dollars worth of savings every month. Speak with your lender to find out if you qualify and whether or not refinancing your loan makes sense for you.
