Auto Loans: How to Refinance with Bad Credit

If you’re thinking about refinancing your car loan, having a low credit score can make the process more difficult. You might not be able to qualify for a lower interest rate or reduce your monthly loan payments if lenders think you’re not a responsible borrower.

However, that doesn’t mean it’s impossible to refinance an auto loan with a poor credit score. Here are a few tips that will help you learn how to refinance a car loan with bad credit.

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How to Refinance a Car Loan with Bad Credit

You can still refinance an auto loan with bad credit, but getting a good rate can be difficult. Borrowers with low credit scores generally pay much higher interest rates. If you have poor credit, you can use these strategies to refinance your auto loan.

Review Your Budget

Start by doing a thorough review of your budget. Figure out how much you can afford to spend each month on your car payment. Then, use an online auto refinance calculator to estimate your new monthly payment based on the loan amount, current interest rate, current loan length, and loan balance.

Remember to factor in other expenses, like gas, car insurance, and maintenance. These costs can add up quickly and could exceed your total monthly car budget. Once you determine how much you can afford to pay for your new car loan, you can move on to the next steps.

Check Your Credit Score

Before you apply for a new loan, it’s a good idea to review your credit report. In addition to your score, you also want to look for incorrect information, like an account you didn’t open. Dispute any errors you find, as they can damage your rating and prevent you from qualifying for a new loan.

Check all three reporting agencies for a complete overview of your credit score. Most lenders that write car loans use Experian and Equifax, but you should also check your TransUnion file. There could also be an error in one agency’s report that’s not reflected in another, so be sure that all statements have accurate information.

There’s no minimum credit score that will guarantee approval when refinancing your auto loan. Some lenders have more strict requirements than others, and some specialize in working with people who are rebuilding their credit histories.

However, if your goal is to get a lower interest rate, it helps to have a higher credit score when you refinance than when you took out your original car loan. You can request a free copy of your credit report once a year.

Knowing what’s on your credit report will also help you set your expectations before shopping for a loan. For example, if there’s a repossession on your credit report, consider looking for lenders that offer refinance loans for applicants like you.

If your credit score hasn’t improved — or it has gone down — since you took out your original car loan, you may want to reconsider refinancing right now.

Contact Your Original Lender

Before looking for a new lender, contact your current one, especially if your loan is in good standing. Your bank may be willing to refinance your auto loan, especially if your credit score has improved.

However, not every financial institution will. And if rates have gone down, your original lender probably won’t want to lose the extra money you’re paying in interest.

Shop Around for the Best Offer

If you want to get a lower interest rate, consider shopping around for a new lender. Even if your original bank or credit union is willing to refinance your loan, getting multiple loan offers can help you get the best loan for your budget.

Don’t just look at the monthly payment, either. You should also compare the interest rate, loan term, origination, and other fees.

Take time to explore your options because even a 1–2% drop in your interest rate could save you a significant amount of money. For example, if you’re looking to refinance your $36,000 loan over a four-year term, you’ll pay $5,379 in interest at 7% and just $3,795 at 5%. The overall savings amount in this scenario is $1,584 or nearly $400 a year.

To minimize the impact on your credit score, ask each lender to do a soft pull of your credit score. Even if they run a hard credit check, most scoring models count multiple credit checks of the same type as a single inquiry, as long as they’re within a 14- to 45-day period. Inquiries related to refinancing shouldn’t hurt your credit score, as long as you’re within that timeframe.

Collect Your Documentation

Once you’ve picked the best loan refinancing offer, your lender will require several documents to finish the paperwork. While you’re waiting for your pre-qualification, here is the information you will need to have ready:

Identification or driver’s license.Proof of income, like a pay stub.Vehicle identification number (VIN).Vehicle registration.Proof of insurance.Social Security number.Payoff statement from your current lender.

What’s Considered a Bad Credit Score?

A credit score of 579 or less is typically considered to be “poor.” Most banks consider a score of 580 to 669 to be “fair,” while anything above 670 is good, very good, or even excellent. Because each lender uses its own guidelines to determine your creditworthiness, a low score may meet one company’s requirements but not another.

Why Should You Refinance a Car Loan?

Even if you have bad credit, refinancing an auto loan can be beneficial. Here are a few reasons to consider refinancing your loan:

You Have a High Interest Rate

If auto loan rates have decreased since you bought your car, refinancing may reduce your interest payment. When researching lenders, remember that new car loans usually have different interest rates than refinanced ones. Historical data can give you a general idea of which direction the market is trending, but you’ll need to contact banks directly for the exact numbers.

You Have a Short-Term Loan

Maybe you want to get a lower monthly payment but you don’t necessarily qualify for a lower interest rate. In that case, you may be able to free up some cash by extending your loan term.

This strategy works well for most borrowers with a short loan that is less than two years. By stretching your payments out over three years or more, your monthly payments will go down.

Just remember that this option will likely cost you more in interest. So, if you choose to extend your auto refinance loan term, consider making additional payments when you have extra cash on hand.

Factors That Impact Auto Refinancing Options

Besides a bad credit score, other factors can impact your auto loan refinancing options. These are some of the factors that might affect your ability to refinance.

Refinancing Requirements

Every bank has specific requirements you must meet before it’s willing to lend you money. They sometimes include how much money you still owe, how many months you have left to pay, and the condition of your vehicle.

Most banks prefer to avoid small-balance loans, so if you have six months or less until you pay it off, you might not be able to get approved, even with a stellar credit score. Likewise, if your car is in poor condition or has high mileage, it’s not worth much to the bank, and they may pass on the chance to refinance it.

Current Income

One of the best ways to get approved is to raise your income. If your paycheck has increased since you took out your original auto loan, your chances of refinancing with bad credit go up.

On the other hand, if your income has decreased since you bought the car, that could be the reason you’re looking for a new loan in the first place. If so, you could get stuck with a higher interest rate if you get approved.

The Status of Your Original Loan

If your original loan is in default, finding another lender to take a risk on you will be even more challenging than having a low credit score.

If you’re behind on your payments, contact your lender. They can help you get back on track so that you can look into refinancing options in the future.

What If You Still Can’t Qualify for a Refinance with Bad Credit?

Sometimes borrowers with bad credit just don’t qualify for refinancing. If you’re in this situation, consider taking one of the following steps:

Ask Someone to Cosign

If you’re struggling to get approved for auto refinancing, you can ask someone to cosign with you. Whether that person is a family member or friend, choosing someone with good credit can help you get the loan. A cosigner can also help you qualify for a better interest rate.

Improve Your Credit Score

Auto lenders use your credit rating to determine if you’ll be a responsible borrower. You can greatly improve your chance of approval if you raise your credit score. Here are a few ways to boost your score:

Payment history: Paying your bills on time should be a priority, and consistency is key. Consider setting up automatic payments for monthly charges that directly affect your score, like your car loan, mortgage, and credit cards.Amounts owed: Lenders want to ensure a refinance won’t overextend you, so keep your amounts owed under 30% of your credit limit. If you’re close to maxing out your credit cards, stop using them and pay down the balances before you apply for a new loan.Length of credit history: How long your credit file has been open is not as important as other factors, but it still counts toward your rating. If you have a credit card that you no longer use, consider keeping the account active.Credit mix: A diverse mix of credit accounts, such as auto loans, mortgages, and credit cards, show banks that you can manage various types of debt. While this is another small factor that goes into your overall score, you should still be aware of it.New credit: When you open several new credit accounts in a short period of time, a lender might view it as a sign that you need to borrow money to stay afloat. Before you apply for any new accounts, make sure the move will help — not hurt — your overall financial situation.

Get a Side Hustle

While a side hustle won’t help you improve your chances of refinancing with bad credit, it may improve your finances enough that you won’t have to take out a new loan. Paying off your car loan faster takes discipline and determination, but it is possible.

In addition, cutting back on expenses, picking up a part-time job, and staying on a budget will help you put as much money as you can toward your debt.

Return the Car

You can always return the car to the dealership if you have no other option and can’t make your monthly car payment. This step is called voluntary repossession. However, you won’t necessarily be able to walk away free and clear. Plus, your credit score will undoubtedly suffer if you take this option.

Refinancing your auto loan with bad credit isn’t always easy, but it’s possible. Before you decide to refinance, follow these tips to improve your chance of getting approved for a new loan, and proactively work to improve your credit in the meantime.

Finance & Insurance Editor

Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.