How to refinance your car loan when you have bad credit

A woman tells her friend how to refinance a car loan with bad credit. A woman tells her friend how to refinance a car loan with bad credit. Image:

In a Nutshell

We understand. It’s frustrating to try to refinance a car loan when you have bad credit. Thankfully, it isn’t all bad news. There are options to refinance auto loans if you have bad credit.

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Will I be able to refinance my car loan if I have bad credit?

Although there are no guarantees, you may be able to refinance your car loan with bad credit. Whether you want to refinance to lower your interest rate, lower your payments or for any other reason, certain lenders specialize in providing auto loan refinancing for those who have bad credit.

Here are the steps you should take when looking to refinance your car loan:

  1. Check your credit reports and credit scores
  2. Work with your lender
  3. Shop around to find the best option
  4. Take steps to further improve your credit scores

What scores do I need to refinance my car loan?

If you’re looking to secure a lower rate, it helps to have better credit scores than when you applied for your last auto loan. That said, “There really isn’t one credit score to focus on that will trigger you to refinance,” says Roger Douville, vice president of lending at rateGenius.

What happens if I’m denied?

If you’re not able to refinance your car loan because of bad credit, you can try to find a cosigner with better credit scores than you to cosign your loan. The cosigner’s participation may be that extra push needed to get the loan approved. If you go the cosigner route, you can reapply quickly. Your other option is to focus on improving your credit scores before you try refinancing again. More on that later.


1. Check your credit reports and credit scores

The first thing you should do when looking to refinance a car loan when you have bad credit is to check your credit reports and credit scores. “Review your credit reports to make sure that everything that is reported is reported accurately according to your records,” Douville says.

Look for errors on your credit reports that may be hurting your credit scores and get them resolved before applying to refinance. With Credit Karma’s Direct Dispute™ tool, you can easily dispute errors on your TransUnion credit report.

To have the best shot at getting a lower rate when you refinance, make sure your credit scores have improved since you took out the loan or that the typical interest rate for auto loans has decreased.

How can you tell if rates have improved? While not perfect, one easy way is to check historical data on average interest rates on new auto loans. If the interest rate in the month you initially financed your vehicle is higher than today’s interest rates, you may want to investigate rates for auto loan refinancing. Remember, new car loan rates are different than refinance auto loan rates. This is simply a tool to see the general interest rate environment for auto loans.

2. Work with your lender

Before you start looking for a new lender to refinance your auto loan, you may want to check with your current lender. If you’ve made a series of on-time payments, your credit scores have improved or interest rates have decreased, your lender may be willing to either modify or refinance your loan to keep your business.

While you may expect your lender to automatically dismiss your request because of your credit, you might be surprised what asking can do. If you can show a history of on-time payments on your car loan, you can argue that you’re a lower risk to the lender than when you initially applied for your loan.

Banks don’t want to lose your business, because that means they’ll lose interest payments too. If a bank can keep a customer by modifying a loan or arranging refinancing, it’s a win-win situation.

Not all lenders will agree to help you, but you have nothing to lose by asking. However, if your lender wants to do a hard pull on your credit reports, be sure you’re ready to shop around with other lenders right away. Many credit scoring models count multiple auto loan inquiries as one hard inquiry if they were made within a short period of time.

3. Shop around to find the best option

Even if your lender fights to keep your business by offering you a better loan, you should still shop around to see if you can secure a better loan elsewhere. Remember to compare all aspects of a loan when refinancing.

Not every lender will consider your application to refinance your auto loan if you have bad credit. It helps to apply with lenders that have a history of working with borrowers with bad credit. Those lenders include Road Loans, Auto Credit Express and Valley Auto Loans.

While a lender may offer a lower interest rate, it may add other fees, such as prepayment penalties, to make up for the lower interest rate. Compare the total cost of each loan by multiplying the monthly payment by the number of payments, then adding all applicable fees to get the total cost of the loan.

4. Take steps to further improve your credit scores

Whether you are approved or denied, you should continue taking steps to further improve your credit scores. Higher credit scores may help you secure lower interest rates on future loans and may allow you to refinance at an even lower rate in the future.

Making on-time payments, reducing the amount of debt you owe relative to your credit limits and keeping credit inquiries to a minimum can all help raise your scores over time.


Bottom line

We understand refinancing a car loan with bad credit may be challenging, but it can be done. Remember, you may not want to attempt to refinance your loan unless your credit scores have improved or interest rates on car loans have dropped.

When you decide it is time to refinance, talk to your current lender to see if it can offer you a lower rate. Then shop around with other lenders and determine whether sticking with your current lender or refinancing with a new lender is best for you. Watch out for hidden fees and longer loan terms that may result in paying more interest.

Don’t forget, you can always work toward improving your credit scores even more with a goal to refinance in the future at an even lower rate.


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