Can You Refinance If You're behind on Payments on Your Car Loan?

The cost of owning a car can be high, and when your car payment is inflated with interest charges, it can be a source of stress and can lead you to wonder “Can you refinance if you’re behind on payments?” It’s not always easy to make payments consistently each month, but missing a payment or two can have negative impacts on your credit report and score. Catching up on payments can help you take charge of your finances and expand your options for refinancing. Read on to learn more about what to do when you’re behind on payments and whether refinancing is an option.

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What Is Refinancing a Car Loan?

Once you’ve agreed to a car loan, you’re not stuck with that loan or the terms you initially agreed to. You can refinance the loan by taking out a new loan from another lender to pay off the old car loan. A common reason to refinance a car loan is if you have improved your credit and now qualify for a lower interest rate and lower monthly payments.

Another reason you might refinance is if you want to remove or add a cosigner to the loan. You may also want to get a lower monthly payment by spreading out the reduced car loan over more months. Refinancing is almost always an option to make your car loan more affordable.

Refinancing a car loan is a good option for a borrower who has made it a point to maximize their financial situation after getting a car loan and used their resources to qualify for a loan with a low interest rate. As long as you agree to the terms of the loan, you can try to refinance when you’re experiencing financial challenges. Even if the lender doesn’t offer a lower rate, you may get a longer loan term with more affordable monthly payments.

Can You Refinance if You’re behind on Payments?

If you’re late on your payments, you won’t be able to refinance your car until you bring the loan back to current. In addition, you may get repeated calls and emails from the lender expecting the payment. The lender could also add a late or missed payment to your credit report and may repossess the vehicle once it has initiated a charge off the debt.

A charge-off occurs when the lender determines you will no longer make payments and then sells the debt to a collections agency. Generally, this step happens with frequent missed payments, and it hinders your ability to get a loan in the future. Therefore, it’s critical to make the monthly payments on your car loan to maintain the health of your account and your ability to take advantage of certain loan modifications or get a new loan with a lower interest rate.

Falling behind on any loan can put you in a bad spot when it comes to credit and fees. Many lenders will charge a late fee for missed payments, which can compound the longer a payment is not made. In addition to late fees, missed payments can damage your credit score, especially if they are more than 30 days late or if the account falls into default. As a borrower, your credit score is one of the main deciding factors when applying for a loan, and missed payments can be considered red flags to financial institutions.

By missing payments, your account will be considered delinquent, meaning you as the borrower have not made a payment by a specified due date and the grace period offered by the loan servicer has elapsed. Delinquent loans can be brought current by making up back payments and past due amounts, plus whatever fees the financial institution has levied. If a delinquent account is not brought back to current, it could be considered in default, which means the financial institution ends the credit agreement due to the borrower not following the terms of the agreement. Either way, late payments are looked at unfavorably by financial institutions and credit reporting agencies.

What to Do If You’re behind on Your Car Payments

A non-current account cannot be refinanced until it is brought back to current status, but that does not mean the account has to fall into delinquency due to financial trouble. In most cases as a borrower, your best option is to reach out your financial institution and explain your situation to see if there is a solution they can offer. Sometimes, the financial institution will agree to extend your repayment period through a payment deferral, creating a longer term for repayment and smaller monthly payments. Your financial institution may also let you pay what you can and tack the remaining amount to the end of the loan. In many cases, it is critical to not miss consecutive payments, so even if you missed a payment one month, contacting your financial institution is still the best option if your financial trouble continues for multiple months due to job loss, unexpected bills, or other circumstances. If you can make up the missed payments in the near future, your loan servicer may be more willing to work with you through the financial hardship.

The worst move you can make as a borrower is to ignore the payment, as your financial institution will not know the reason for the missed payment. If there is any flexibility on the part of the financial institution, it is better to reach out as soon as you can and try to negotiate terms with the lender.

Refinancing a Car Loan with Bad Credit

With any credit application, there’s a risk that the terms may not be agreeable or that the lender won’t approve it, but there are instances where a borrower with bad credit can — and should — look for a loan modification. If you need a brief reprieve from making car payments, refinancing can offer the opportunity to take a month or so off from making monthly payments. That temporary pause could be enough to create a cushion for the future or allow you to catch up on other financial obligations. You may also be looking to cash out against the equity of the vehicle, especially if you put a significant down payment on the loan.

Other Options to Get Out of a Car Loan

Refinancing a car loan may not be the right option for you. It may be better to get out of the loan altogether. You can trade in your vehicle for a cheaper one or sell it to a dealership. This is especially effective if you have equity in the vehicle, which a dealership can then pay out or put toward a down payment on a new loan. You can also sell your vehicle privately and use the money to pay off the loan with the lender. This scenario leaves you without a vehicle, though it may still be the best option in some situations.

When it comes to refinancing car loans, your resason for refinancing is an important factor. If you have improved your credit and can get a better interest rate, refinancing can be a great option, as long as you consider any additional fees required. If you’ve fallen behind on a few payments and aren’t current in your loan, refinancing is not the answer and is most likely not an option. Refinancing is as big of a decision as applying for an initial car loan, and you should consider it just as seriously. The financial implications of making monthly payments for a car loan can make — or break — your future borrowing power.

Hearst Autos Research, produced independently of the Car and Driver editorial staff, provides articles about cars and the automotive industry to help readers make informed purchasing choices.

Finance & Insurance Editor

Ashley Donohoe has written professionally about business and finance since 2010 and has served as an expert reviewer since 2017. Her work has appeared on major websites such as Money.com, The Balance, and the Miami Herald. Having run her own business, she has broad expertise in taxation, financial management, accounting, and investments. Her educational background includes a B.S. in Multidisciplinary Studies, Master of Business Administration, and certifications in accounting and taxation.