How to Refinance Your Auto Loan When You Have Bad Credit

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How to Refinance Your Auto Loan When You Have Bad Credit

For many Americans, a reliable means of transportation is a necessity and many Americans have to get an auto loan in order to be able to afford a car.

But what if your financial situation changes during the life of your auto loan so you can't afford the original payment - and you don't have a good credit score?

What score do I need to qualify for refinancing?

According to Elle Kaplan, CEO of wealth management company LexION Capital, "Every bank has different qualifications, so there isn't a set-in-stone credit score that will allow you to refinance."

The importance of a good credit score is that it typically gives you access to better loan terms.

What if my score is too low?

If your credit score isn't great, you may still be able to refinance, though it could be harder to find options and you'll want to take a close look to see what makes the most sense for you.

Matt Jones, senior editor at automotive website Edmunds.com, says, "Often, a lender will be happy to see consistent, on-time car payments. So even if a person's score hasn't improved much, a buyer may be able to refinance a loan to a lower rate just based on a good solid recent history of on-time payments."

Other important factors to consider when refinancing include:

  • If your car is an older model
  • If you owe more on the car than it's worth.
  • If your car has clocked over 100,000 miles.

These factors will likely reduce the likelihood of finding a refinance or better rates, as the only real collateral (which is security pledged for repayment of the loan) is the car itself.

Ready to refinance? Here are some key steps to take:

1. Work with your lender.

This may seem counterintuitive, but according to Carroll Lachnit, features editor for Edmunds.com, calling your current lender should be one of the first things you do if you can't make your payment. "Contact the bank or finance company that holds the car loan as soon as you know there's an issue with timely payment."

Lachnit adds that many people simply don't realize it's often best to work with your lender. This puts all the cards on the table and allows the lender to find suitable options for you, such as lengthening the term of the loan, which could reduce individual payments but may cost you more in the long term.

While not desirable, having a longer loan may help you stay on top of your monthly bills.

2. Shop around to find the best options.

There are several options you can consider when refinancing a car:

  • Brick and mortar banks. Even if you have a credit score that needs work, banks may work with you if you have an established history with them.
  • Credit unions. Like banks, credit unions may be more conservative in their lending. However, if you're a member, they might offer you a better rate than a bank.
  • Peer-to-peer (P2P) lending. P2P loans are the new kid on the lending block. P2P lending is the practice of connecting people who want loans with people who have money to lend. P2P sites like Lending Club and Prosper, Credit Karma marketing partners, may allow you to refinance your auto loan when securing refinancing from a bank isn't an option.

3. Take steps to improve your credit score.

If your score isn't where you'd like it to be, Kaplan offers a few simple ways that may help move your credit in the right direction:

  • Consider putting a small recurring payment, like a Netflix subscription, and pay the balance off in full each month to help establish a positive borrowing history.
  • Consider becoming an authorized user on someone else's credit card. You may benefit if the account has a long history and the person has a positive on-time payment history; however, you may not want to get your own copy of the card so you can avoid the temptation to overspend.

Beyond the tips from Kaplan, paying your bills in a timely manner and lowering your credit utilization rate can help boost your score over time, which may benefit you in future lending situations.

Bottom Line

Refinancing an auto loan with bad credit can be a challenge, but you do have options. Continue to make your monthly payments and, if you can't make the payments, be transparent with your current lender as they may be able to help.

About the Author: John Schmoll, MBA, is a former stockbroker and veteran of the financial services industry. He left a career with a well-known brokerage house in 2012 to grow an advertising business with his wife, write about finance and start a personal finance site, Frugal Rules. His work has been featured in Forbes, Fortune, U.S. News & World Report, Yahoo!Finance, CNBC, Daily Finance and more. Follow John on Twitter.

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