How Much Can I Save by Renegotiating My Car Loan?

How Much Can I Save by Renegotiating My Car Loan?

Cars aren’t exactly cheap these days, which is why looking for ways to save money on your car payments is a completely normal thing to do. One strategy a growing number of car owners are considering is renegotiating their car loan.

In some situations, renegotiating a car loan in Toronto really makes sense. It can be a savvy financial move which saves you significant amount of money, putting you in a prime spot. Other times the effects of renegotiating your car loan are negligible or maybe even negative, so it might not be worth the effort.

It Depends

Of course, everyone wants a clear, straightforward answer to how much they’ll save by renegotiation their car loan in Toronto. The fact is there are too many variables to give a blanket answer to that question.

Not everyone’s car loan situation will be the same

Interest

First off, your credit file is unique and not entirely like anyone else’s. When you apply for credit, including renegotiating a car loan, your current lender will look over that with a fine tooth comb. That alone will help determine what you qualify for as far as an interest rate, which does a lot for determining how much you save from the whole transaction.

Naturally, you want to go through this process after your credit situation has improved dramatically since you originally financed the car. Otherwise, you’ll actually be a poor position to negotiate for better loan terms, and that defeats the purpose of renegotiating the car loan in the first place.

The best way to know if your credit situation has been getting better or worse is to constantly monitor it. There are many services which will help you do this, some for a fee and some without costing anything. Even if you are only getting an estimated credit score, just knowing what items are being reported to the credit bureaus can help you make a more educated decision about if renegotiating your car loan is a good idea or not. Obviously, if you credit situation has worsened since you bought the car, you should probably just sit tight and keep your current loan. But a huge improvement in your credit could mean a big improvement in the interest rate, and that’s when it’s a great idea to talk to your lender.

Pay attention to what’s going on with interest rates in Canada. Once they go down or if they are at a low point versus when you originally financed your ride, you have a better chance of getting a significantly lower interest rate on your loan. That means greater savings, so it might be worth waiting until interest rates drop at least temporarily.

Fees

When you renegotiate a car loan, the lender might want you to pay some fees. Those eat into whatever savings you might enjoy from the whole transaction, so don’t just gloss over this extra money. Instead, you must factor the fees into everything, because they could possibly be high enough to make to wipe out a good portion of your savings.

On some loans there’s a prepayment penalty. You’ll have to look through all the fine print in your loan documents to find that clause, but it’s one that could make renegotiating your car loan a negative equation. Like everything else, you’ll need to do the math to decide if such penalties are worth paying versus the benefit you’d be receiving.

Sadly, even if you end up getting a significantly lower interest rate on your car loan in Toronto, the longer term might erase that benefit. In fact, you could end up paying more in interest for your car. This is why it’s wise to run the calculations yourself, so you know if you’re actually saving money or not. What this means is that extending the loan is something you should only do if it’s necessary, like if you absolutely need to increase your monthly cash flow to attend to something that’s a top priority. Otherwise, it’s almost always the safer bet to keep your loan term the same or even shorten it, saving you money overall, even if your monthly payments increase some.

Term

When you renegotiate your car loan in Toronto, are you going to change the original loan term or change it? It’s an important decision you need to make since it has a significant impact on your financial future.

If you keep the original loan term but get a lower interest rate, your monthly payment amount won’t decrease by much. That doesn’t mean you won’t save money on the loan, because a lower interest rate means overall you’re paying less.

Perhaps what you’re really interested in is shrinking the monthly payment amount. If that’s the case, renegotiating the loan for a longer term is key. That means instead of paying off the car in something like 36 months you’re doing it in something like 72 months. More payments mean the amount you need to pay each month is far smaller.

Sometimes it makes sense to lengthen the term of your car loan in Toronto. For example, if you have the opportunity to invest money into something which will potentially pay a higher amount of interest than your car loan costs. By taking that extra amount you’ve been paying for your car each month and investing it, you actually get ahead financially.

Maybe your monthly budget has changed because of a significant life event like the birth of a child. In that situation, having more money in the monthly budget will help with the transition, making it worth renegotiating your car loan for a longer term.

Whether or not you save more money keeping the original loan term or lengthening it really depends on how much you still owe for your vehicle and the new interest rate. You must run the numbers to understand which would be the wisest choice to make.

The lender will let you know if lengthening the term of your car loan is possible, and if so by how much you’re allowed to lengthen it. As cars age they become too old for certain loan options, so your lender might not be willing to lengthen the loan term on an aging set of wheels versus something which is only a few years old.

What If You Paid More Aggressively?

While renegotiating your car loan in Toronto is certainly an option to explore, you might also want to look at just paying off the loan more aggressively. This could turn out to be the savvier financial move, so don’t overlook it as some supposedly foolish strategy.

You might consider paying off your loan faster

Paying more aggressively involves making more than the scheduled monthly amount. You can choose to do this every month or save up money and make larger lump payments. Talk with your lender and see if you need to specify that these extra payments go toward the principle on your loan instead of just being counted as the next scheduled payment, since that’s where the biggest benefit will be seen.

When you pay on a car loan, at first you’re mostly paying interest. A smaller portion goes toward the principle, or the amount of money you originally borrowed. While the interest rate on most loans is fixed, the amount of money you pay for interest each month is calculated using the principle total. By shrinking that amount, you start paying less and less interest, which saves you money and pays off your loan faster.

Exactly how much you’ll save depends on how much you pay towards the principle and when, plus the amount of the principle for the loan and the interest rate. It’s worth doing the math to figure all this out, since that’s how you figure out if renegotiating the loan or paying more aggressively on it is the best strategy.

Being Underwater

It’s certainly tempting to think about renegotiating your car loan when you’re underwater, but that’s not a wise move. Being underwater is also sometimes called being upside down in the loan, or you owe more for the car than it’s worth.

Because a portion of the loan goes beyond what the car is valued at on the open market, the lender is taking a huge risk by extending financing to you. If you stop paying for the car, even if it’s repossessed the lender might be stuck with a significant deficit after the sale of the car. To make up for that risk, the lender might assign a high interest rate. It’s even possible that the interest rate you’d qualify for would be higher than what you have for the loan at the moment. That defeats the whole purpose of renegotiating the car loan.

There is a way around this problem, but you might not like it. You need to pay off the amount owed on the loan that’s beyond the car’s value at the time you enter the renegotiated car loan in Toronto. That means you’re no longer underwater, allowing the lender to qualify you for a lower interest rate. Doing this can involve some significant sacrifices, but you might find it worth the extra effort.

Plenty of people decide they want to renegotiate the loan for a car they bought brand new off the lot. That’s not necessarily a bad idea, but if you purchased the car within the last year or so, it might not work. Many new cars immediately lose a significant amount of their value, and that trend can continue for the next year or two, depending on what model you purchase. In that kind of a situation you’ll be upside down in the loan, so it’s quite likely that the interest rate you’ll qualify for will be higher than you already have, maybe by a big amount.

Renegotiating Versus Repossession

If you’re struggling to make your car payments thanks to a reduction in work hours or other financial difficulties, your lender might be willing to renegotiate the loan. This can be a win for the lender since with smaller payments you’ll be able to keep up, and it’s a win for you since you don’t have to deal with the unpleasant after effects of having your car repossessed.

Sometimes you can avoid repossession through renegotiations

Instead of waiting for a tow truck to show up at your house, act now and do something. You might be surprised at the response from your lender, plus you can contact other lenders to see if they can help.

Conclusion

The question of how much you can save renegotiating a car loan in Toronto is a tricky one. There are so many different factors to take into consideration that it’s impossible to provide a simple answer. The only want to really know what benefit, if any, you would get is to take a hard look at your situation and what might potentially improve.

Often, people renegotiate their car loan because a significant life event has changed their financial outlook. It might make sense to expand the term of your loan and lower the monthly payments, allowing you to pay extra on the principle when you’re able to, instead of being committed to a higher monthly payment each month.

Just like with any financial decision, don’t rush one way or the other. Do your homework, including all the math associated with different scenarios, and even watch interest rates for Canada closely before making a decision. You’ll feel better about what happens next and will be able to navigate the ensuing process with less stress.

You can even go through the application process of renegotiating your car loan with your lender before deciding what to do. While you’re at it, contact other lenders and apply with them as well, because shopping around for the best deal is always a wise move. This will provide hard numbers about what you qualify for, so your calculations will then be less theoretical and more realistic. Besides, applying usually doesn’t cost a thing, so you’re not really running much of a risk by going through the process.

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