Refinancing a car loan when you have bad credit can seem daunting, but it is possible if you do your research and prepare thoroughly. Refinancing to a lower interest rate or more affordable monthly payment could save you thousands over the life of your auto loan. Follow this guide to learn if refinancing makes sense for your situation and how to successfully refinance a car loan when you have bad credit.
What Does Bad Credit Mean for Refinancing?
Bad credit typically refers to credit scores below 630 on the FICO scale. The lower your score, the higher interest rate lenders will likely charge. Those with poor credit are often seen as higher risk borrowers.
Specialty lenders that work with bad credit applicants will often refinance auto loans, but expect to pay a higher interest rate than those with good credit. Rates can easily be over 10% or up to 20% with deep subprime credit.
That said, if your score has improved since you took out your original auto loan, you may be able to qualify for a lower rate by refinancing. Do your research to see if the savings outweigh the costs.
Also Read: Lease a Car with Bad Credit | Here’s How?
When Does Refinancing Make Sense with Bad Credit?
There are a few key situations when refinancing an auto loan could be smart if you have less-than-perfect credit:
- Your credit score has increased – Even a small score improvement could mean savings. Refinancing is worthwhile if you get at least 2% lower interest.
- Interest rates have dropped – If market rates are at least 2% lower than when you financed originally, look into refinancing.
- You need a lower monthly payment – Stretching out the loan term via refinancing can reduce your payment, though you pay more overall in interest.
- You got a loan through the dealer – They may have marked up your rate. Refinancing with another lender could offer savings.
- You want to remove a co-signer – If your credit has improved, refinancing in your name only may be possible.
What Are the Risks of Refinancing with Bad Credit?
While refinancing an auto loan can provide benefits, there are some potential risks to be aware of:
- Higher interest rate – Lenders see bad credit borrowers as higher risk, so you’ll likely pay a higher interest rate than those with good credit. Shop around for the best deals.
- Prepayment penalties – Your existing loan may charge a penalty for paying off the balance early. Factor this cost into your calculations.
- Longer loan term – Extending your loan to reduce the monthly payment means you pay more interest overall. Avoid stretching the term too long.
- Owing more than car’s value – If you owe more than what your car is currently worth, refinancing may be difficult or impossible.
- Credit score dip – A hard inquiry when applying for a refi will cause a small temporary drop in your credit score. Do all rate shopping in a focused two-week period to minimize this impact.
6 Steps to Refinancing a Car Loan with Bad Credit
Follow these key steps for the best chance of approval and lowest interest rate when refinancing an auto loan with less-than-perfect credit:
1. Check your credit score
Review your credit reports and FICO or VantageScore from all three bureaus before applying to refinance. Know your score and look for errors to dispute to maximize your approval odds.
2. Research current auto loan refinance rates
Compare average used car refinance rates to your existing rate to see if the market offers potential savings. Focus on rates for your credit score tier.
3. Calculate potential monthly savings
Use an auto loan refinance calculator to compare your current loan to possible new terms and determine possible savings.
4. Shop refinance lenders and compare offers
Look for lenders that work with bad credit borrowers. Compare their rate quotes and fees to find the best option. Many allow soft pull pre-qualification to estimate rates.
5. Submit loan applications
Once you select a lender or two, complete full applications for official offers. Do so within a 14-day period to minimize credit score impact.
- Evaluate offers and choose the best loan
Review all the loan details including fees, prepayment penalties, and loan term. Select the offer that provides the most savings overall.
7 Tips for Refinancing an Auto Loan with Bad Credit
Beyond the basics, here are some pro tips to boost your chances of approval and get the best refinance deal possible:
- Improve your credit – Pay all bills on time and lower credit utilization for 6+ months before applying. Every bit helps.
- Get a cosigner – Asking someone with good credit to co-sign can help you qualify and get a lower rate.
- Know your car’s value – If you owe more than the car is worth, it’s harder to qualify for refinancing.
- Check for prepayment penalties – Factor any existing loan penalties into your cost calculations before deciding to refinance.
- Avoid extending the loan term too long – While it lowers the monthly payment, you pay much more interest over time.
- Compare total interest paid – Crunch the numbers to see total potential interest savings, not just the monthly payment or APR.
- Read the fine print – Carefully review all loan terms, fees, and policies from any lender before accepting an offer.
Frequently Asked Questions
Can you refinance a car loan if your credit score is under 600?
It can be very challenging to refinance if your credit score is below 600, but some subprime lenders may approve borrowers with scores in the 500s. Expect very high interest rates of 15-25% with deep subprime credit.
How many points can refinance a car loan lower your interest rate?
Most experts recommend refinancing only if you can get at least a 2 percentage point lower interest rate. With bad credit, a 1-3 point reduction is more realistic in many cases. Every bit of savings helps.
Is it bad to refinance a car loan?
Refinancing itself is not inherently bad, but it’s important to ensure you get approved and that the new loan terms actually save you money overall. Refinancing just to lower a monthly payment that extends the loan term significantly is not ideal.
Can you refinance an auto loan with the same lender?
Some auto lenders allow borrowers to refinance within their products. Check with your existing lender to see if they offer refinancing and possibly better rates, especially if your credit score has improved.
How soon can you refinance a car loan after buying?
Most lenders require at least six months of on-time payments before they will consider refinancing one of their auto loans. This shows you can responsibly manage this debt. Wait until you meet requirements.
Is Refinancing a Car Loan with Bad Credit Right for You?
While refinancing an auto loan with less-than-perfect credit can be challenging, it is possible in many cases. Following the steps in this guide will help you determine if refinancing makes financial sense for your situation and set you up for success in qualifying and finding the best new loan terms.
