Can You Refinance Your Car Loan with Bad Credit?
Written by: Jacob S.
Published on:
Refinancing your car loan can be a smart way to lower your monthly payment, reduce your interest rate, or adjust your loan terms to better suit your finances. But if your credit score isn’t where you want it to be, you might wonder if refinancing is even an option. Good news: It’s possible to refinance your car loan, even with less-than-perfect credit.
Key Takeaways
- Auto loan refinancing can improve loan terms, even with bad credit.
- Shopping around and considering cosigners can help secure better rates.
- Understand the pros, cons, and alternatives before making a decision.
What Is Auto Loan Refinancing?
Auto loan refinancing is the process of replacing your current car loan with a new one, often with better terms. The main goal is to improve your financial situation by making your loan more manageable. Refinancing can help you lower your monthly payment by reducing the interest rate or extending the loan term. It can also save you money over time by cutting down the total interest paid on the loan. Additionally, refinancing allows you to adjust the length of the loan to better fit your budget or financial goals.
Here are the main benefits of refinancing in general:
- Lower your monthly payment.
- Reduce the total interest you’ll pay over the life of the loan.
- Adjust your loan length to match your budget or financial goals.
- Improve your debt-to-income (DTI) ratio.
Can You Refinance Your Car Loan If You Have Bad Credit?
Yes, refinancing a car loan with bad credit is possible. However, the terms you’re offered might not be as favorable as those for borrowers with strong credit. To improve your chances:
- Shop around. Research lenders that specialize in bad credit refinancing. Comparing offers can help you find the best terms available.
- Consider a cosigner. A cosigner with good credit can improve your chances of securing a loan with better terms.
- Wait and improve credit. If your financial situation allows, focus on improving your credit score before applying for refinancing.
Should You Refinance Your Car Loan?
Refinancing isn’t right for everyone. To decide if it’s a good option, ask yourself these key questions:
- Has your credit score improved? If your credit score has gone up since you got your original loan, you might qualify for a lower interest rate now. Not sure where your credit stands? Many lenders let you check rates without affecting your credit score, so you can explore options risk-free.
- Are you struggling with payments? If making your monthly payment is tough, refinancing could lower it to a more manageable amount. But first, talk to your current lender—they might offer temporary hardship programs to help.
- Have interest rates dropped? Interest rates fluctuate over time. If rates are now lower than when you first got your loan, refinancing could save you money.
- Have you refinanced before? While you can refinance multiple times, extending your loan term repeatedly might cost you more in interest or leave you owing more than your car is worth.
How To Refinance Your Auto Loan
Here are some simple steps to get a refinance started:
- Check your financial situation. Take a close look at your budget, credit score, and current loan terms. This helps you estimate what you can afford and the type of rates you might qualify for.
- Shop around for lenders. Start with your current lender, but don’t stop there. Compare offers from banks, credit unions, and online lenders to find the best rates and terms.
- Look for competitive APRs, manageable loan terms, and any fees (like early payoff penalties).
- Consider whether you’d benefit from a co-signer.
- Prequalify for offers. Prequalifying shows you potential rates without affecting your credit score.
Pro Tip: Hard credit checks can temporarily lower your credit score, but if you shop for loans within 14–45 days (depending on the scoring model), multiple inquiries count as just one.
- Submit your application. Once you’ve found the best offer, gather the required documents (proof of income, car details, etc.) and apply.
- Finalize your new loan. Review your loan agreement carefully, ask questions, and sign when you’re ready. Your new lender will pay off your old loan, and you’ll begin making payments on the new one.
Why Refinancing Could Be Worth It
Refinancing might help you take control of your car loan, even if you have bad credit. It’s all about understanding your options, comparing offers, and making a choice that aligns with your financial goals.
| Scenario | Pros | Cons |
|---|---|---|
| Lower interest rates are available | Save money on interest costs over the life of the loan | May not qualify if credit has not improved |
| Need lower monthly payments | Reduces financial burden in the short term | Extended loan term increases total interest paid over time |
| Want to remove a cosigner | Gain financial independence | Potential for higher rates due to individual credit evaluation |
| Financial situation has changed | Adjust loan terms to better fit new income or expense levels | Additional fees, such as origination fees or penalties, may apply |
| Facing negative equity in the car | May allow some financial flexibility | Refinancing could worsen negative equity if the new loan exceeds the car’s value |
Pros of Refinancing
Refinancing a car loan can be a smart financial move under the right circumstances:
- Lower interest rates are available. If market rates have dropped or your credit has improved since the original loan, refinancing can save you money on interest.
- You need lower monthly payments. Extending the loan term can reduce monthly payments, though it may increase the total cost of the loan over time.
- You want to remove a cosigner. If your financial situation has stabilized, refinancing can allow you to take full responsibility for the loan and remove a cosigner.
- Your financial situation has changed. Refinancing can help you adjust your loan terms to better fit your current income and expenses.
By carefully considering your options and understanding the potential downsides, you can make an informed decision about whether refinancing is the right step for your financial journey.
Cons of Refinancing
Refinancing a car loan with bad credit might seem like a good way to lower your monthly payments, but it can come with significant downsides. Here are a few potential challenges:
- Higher interest rates. Borrowers with poor credit scores are often charged higher interest rates. This means that while your monthly payment might decrease, you could end up paying significantly more in interest over the life of the loan.
- Additional fees. Lenders may charge origination fees, prepayment penalties, or other administrative costs. These can add up quickly and negate the benefits of refinancing.
- Negative equity risk. If your car’s value is less than the remaining balance of your loan (negative equity), refinancing could leave you in a precarious financial position. Negative equity may also limit your ability to trade in or sell your car later.
- Limited options. With bad credit, the pool of lenders willing to refinance your loan shrinks. This limits your ability to shop around for competitive terms, potentially locking you into less favorable agreements.
- Extended loan terms. Refinancing often involves extending the term of your loan to reduce monthly payments. While this provides short-term relief, it increases the overall interest paid over time.
- Potential credit impact. The process of refinancing involves a hard credit inquiry, which can temporarily lower your credit score. Additionally, opening a new loan account may impact the average age of your credit accounts, a key factor in your credit score calculation.
Alternatives To Refinancing Your Car Loan
If refinancing isn’t the right choice for your financial situation, consider these alternatives:
- Renegotiate with your current lender. Reach out to your current lender to discuss modifying the terms of your existing loan. Some lenders may offer hardship programs or temporarily lower your interest rate.
- Improve your credit first. Take steps to enhance your credit score before pursuing refinancing. Even a modest improvement can open up better loan options and lower rates.
- Make extra payments. If your budget allows, making extra payments toward your principal balance can reduce the overall cost of your loan and shorten its term.
- Trade down your vehicle. Selling your current car and purchasing a more affordable one can alleviate your financial burden and reduce monthly expenses.
- Seek financial counseling. A certified financial counselor can help you explore other strategies to manage your debt and improve your financial health.
Related: Is it better to repair your old car or buy new?
How To Improve Your Credit Before a Refi
Improving your bad credit score is a gradual process, but consistent effort pays off. Here are some actionable strategies:
- Pay bills on time. Payment history accounts for a significant portion of your credit score. Automate payments or set reminders to ensure you never miss a due date.
- Reduce debt. Work on lowering your total debt, particularly revolving credit like credit card balances. Aim for a credit utilization rate below 30% of your available credit.
- Dispute errors on your credit report. Obtain your free annual credit report from each bureau (Equifax, Experian, and TransUnion) and check for inaccuracies. File disputes for any incorrect or outdated information.
- Avoid new credit applications. Each new credit application results in a hard inquiry, which can lower your score temporarily. Limit applications to when they’re necessary.
- Use a secured credit card. If you’re rebuilding your credit, a secured credit card can help. Make small, manageable charges and pay off the balance in full each month to establish a positive payment history.
- Keep old accounts open. The length of your credit history impacts your score. Avoid closing older accounts unless necessary.
Related Frequently Asked Questions (FAQs)
Here are some additional questions readers frequently ask about refinancing a car loan with bad credit.
Is Refinancing Worth It with Bad Credit?
Refinancing with bad credit can be worth it if it significantly lowers your monthly payments and you’re struggling to keep up. However, carefully evaluate the long-term costs, such as higher interest rates and fees, to determine if it’s the right move for your situation.
Is Refinancing Bad for Your Credit Score?
Refinancing can cause a temporary dip in your credit score due to the hard inquiry and opening of a new account. Over time, consistent on-time payments on the refinanced loan can help rebuild your score.
Are There Lenders Who Specialize in Bad Credit Refinancing?
Yes, some lenders cater specifically to borrowers with poor credit. Be cautious and thoroughly review the terms, as these loans often come with higher interest rates and additional fees.
Can I Be Denied To Refinance My Car?
Yes, lenders can deny your refinancing application. Common reasons include having a low credit score, insufficient income, negative equity in your car, or the vehicle not meeting the lender’s requirements. To improve your chances, ensure your credit report is accurate, pay down existing debts, and shop around for lenders who specialize in bad-credit refinancing.
How Long Should I Wait To Refinance My Car With Bad Credit?
There’s no specific waiting period, but it’s often a good idea to wait until your credit score improves or interest rates drop. If your financial situation has recently stabilized, such as steady income or reduced debt, you may qualify for better terms. Generally, refinancing too soon after your original loan might not yield significant benefits, as vehicles depreciate quickly in their first year.
What’s the Minimum Credit Score for Refinancing?
There’s no universal minimum credit score to refinance a car loan. While good credit can make it easier to qualify for better rates, some lenders specialize in helping borrowers with bad or subprime credit.
What Is the Minimum Amount To Refinance a Car?
Most lenders set a minimum loan amount for refinancing, which can range from $5,000 to $10,000. This minimum ensures the loan is cost-effective for both the borrower and the lender. Check with individual lenders for their specific requirements, as terms can vary widely.
