Personal Finance

Refinancing Your Car With Bad Credit (Complete Guide)

When you first bought your vehicle, you probably didn’t get the best interest rate if you’re now considering refinancing your car. Over the life of the loan, the interest that costs you thousands of dollars from your original loan amount.

That extra money adds so much to that price tag, that it’s frustrating when you do the math.

You might feel discouraged that your poor credit affects your chance to refinance your loan. But don’t let your low credit score stop you from shopping around to save with a lower interest rate.

Let’s learn more about how you might be able to refinance your car with bad credit.

Refinance with bad credit

Why Refinance your Auto Loan?

Based on your financial situation, refinancing your auto loan could make sense. The most common reason to refinance your car loan is that the interest rate environment is favorable for borrowers.

A lower rate equates to a lower loan amount. When you refinance your auto loan at a lower annual percentage rate (APR), you’ll be paying less on interest fees.

Your credit score will impact the interest rate for your car loan, but refinancing may help lower your payment overall.

Below are other reasons that you might consider refinancing.

Lower your Monthly Payments

Lowering the interest rate on your existing loan may also mean that you are increasing the loan term to repay your loan. Your original loan amount is extended for several months or years as a result.

In both these cases, the effect is that it lowers your monthly payments.

A lower payment translates to more money in your budget. Plus if you lower your monthly payment amount, that also decreases your chances of missing a payment.

Receive some Cash

If an unexpected event like losing your job or a medical emergency occurs, it could make sense to use your car’s equity to access cash. The interest rate on an auto refinance loan is likely lower than other options like Payday loans.

Sock away Money in your Savings

As mentioned, your loan payments will decrease by refinancing your car. Put that money to good use by using it to line your savings.

Use it to start an emergency saving, add to a retirement fund, and reach other savings goals. A little bit can go a long way and give you funds to start on these goals that you’ve been putting off.

Improve your Credit Score

If you are trying to refinance a car and the only options are a subprime loan, this could actually help improve your credit score. People who have low credit scores and bad credit typically can only qualify for a subprime loan.

These loans have higher interest rates than other types of auto loans. This is because the lender is accepting more risk by making that car loan.

This can be turned into a positive however if you make your loan payments on time consistently. Your bad credit will improve by having this positive credit history. As you get better credit, the chances that you’ll qualify for a lower interest rate on financial products will also increase. You may choose to work with credit repair companies if you have a special situation.

Switch from a Lease

Have you reached the end of the lease and you want to purchase the car? Or perhaps you don’t want to wait for it to end to buy it out? With some limitations with the latter, you can typically do this buy-out at any time.

At the end of the lease, there is a balloon payment that consists of the rest of the money to pay on the vehicle must be paid in one lump sum. Instead of making that balloon payment, you can use an auto refinance to increase the terms.

Before Refinancing your Auto Loan: Factors to Consider

Car loan refinancing may be able to save money if there are lower interest rates available. This is among the reasons to consider refinancing.

However, if your credit history is less than ideal and your credit score reflects that, you might be able to lower your interest rate. You may be able to increase the loan term with a new loan with refinancing.

Refinancing-Credit score

This will save you money by lowering your monthly payment in the short run. In the long run, an auto refinance that increases your loan terms will cost more because of the interest.

You should run the numbers on what interest charges would be on a car loan if you do this. It’s possible that any advantage of saving money from refinancing will be canceled out

Consider the following factors before making the decision to refinance your car:

Your Credit Score

Just like many other financial products, your credit score determines what rate you receive on an auto loan refinance. Generally speaking, the higher your credit score the more favorable your rate will be.

From the time you got your current loan, if your credit score has gone up, you may be able to receive a lower rate. This could also be possible because of changes in the market that have to lead to lower interest rates.

Lenders have their own underwriting criteria and credit scoring models that they use. Hence the credit score requirements may vary from lender to lender. Here’s a guide of the credit scores that lenders typically go by:

  • 781-850: Super prime
  • 661 – 780: Prime
  • 601-660: Near prime
  • 500-600: Subprime
  • 300-499: Deep subprime

There is no universal minimum credit score that’s required for a car loan or auto loan refinancing. People who have a 660 or higher credit score will typically receive the best auto refinance rates.

Dealer Financing

Did you get dealer financing on your original auto loan? Lenders may provide incentives to dealers that offer their auto loans to customers. You probably got a higher interest rate on that original loan if you didn’t negotiate.

Auto loan refinancing in these cases could save you money. Always shop around with different lenders with taking out loans. This will fetch you the best loan terms to save money and keep your payments low.

When did you last Refinance Your Car?

Refinancing your car loan will impact your credit. Keep this in mind since there’s no limit to how many times you can refinance a car. If you have other plans like buying a house, dinging your credit with refinancing might not be well-timed.

There are also some risks to refinancing your car loan to consider. For example, if you’re refinancing an auto loan to increase your loan terms, that draws out your debt. The possibility of going upside down on your car loan increases too.

If you refinance a car multiple times, these risks will also multiply.

Refinancing a Car Loan with Bad Credit

If you have better credit since you got your current auto loan, you could save on interest charges at a lower rate.Bad credit can make it hard to refinance a car with this benefit.

It’s still possible to save money with bad credit on a refinance loan. If the rates on loans have reduced since you got your loan, a lower rate might still be possible.

Check out data on the interest rates on new auto loans, including their history to see if rates are lower today than when you got your current loan. Refinance loans on cars are different from new auto loans, but you’ll get a general sense of how things are trending.

Refinancing Car Loans And Bad Credit

Now if you’re seeking to refinance loans to lower your monthly payment, you could do this by extending the term. This can be done without considering the rate if you’re willing to pay more interest on the new loan overall.

Before you jump to refinance your car loan, take these steps below. Especially if you have bad credit, you ensure that your goals and needs can be accomplished.

Review your Credit Score and Credit Report

To refinance a car loan, you’ll need to fill out a loan application. The lender will pull your credit scores and report to check your credit.

Before applying, you should know where your credit stands. Get a copy of your credit report and check it for any errors that might be on it. These inaccuracies could be affecting your credit so you want to clean those up before applying for refinancing loans. Dispute these errors with the credit bureau agency. It takes at least 30 days to resolve these mistakes.

Also, make sure to check your credit score you start to shop around for lenders. This will help set expectations for what terms a lender may offer. If you have bad credit, it could also help identify which lenders to target for your refinance loan. Bad credit auto lenders are out there that work with your credit history.

For example, if you’ve had a home that was foreclosed on, you should find lenders who work with borrowers in this situation.

Credit Scores for Auto Refinancing

As mentioned, there are no minimum credit score criteria for a refinance loan. The credit requirements will vary by lender. Getting a car loan with bad credit will slim down your list of potential lenders to shop.

There are certain lenders that specifically work with people with bad credit. A refinance loan on your vehicle might not get you a lower rate.

Bad credit auto loans won’t give you the best rate. If this is your ultimate goal, then you might work on improving your credit first.

Talk to your Current Lender First

Before seeking a loan with bad credit, talk to your current lender. If you’ve made your payments on time and are in good standing, your lender might agree to offer a refinance. Not every lender does vehicle refinancing on their loans, so make sure you find that out.

Another reason to check with your lender is to see if there are prepayment penalties. The majority of subprime auto loans include these penalties for paying off your loan early.

So if you had bad credit on your loan when you first bought the vehicle, it is likely that there are these costs. The penalties themselves will vary by lender. For example, one common penalty is that the borrower is charged six months’ interest on the loan when they prepay the first five years.

Be sure to calculate what the prepayment penalty would be for your situation. It could be the difference on whether or not to refinance.

Window Shop for the Best Loan Terms

Your lender may agree to refinance your current loan which is great! But you should still see what you can get from competitors. Even if you are shopping for a car loan with bad credit, there’s a chance you can get a better deal somewhere else.

How to Improve your Credit Score

You might decide that although your current loan isn’t the best, the options available don’t meet your goals. Working on improving your credit will open up the possibilities, however.

Payment for Credit

Here a few ways to improve your credit below.

Pay off your Existing Debt

If you have debt, paying them off could help increase your credit score. This also reduces the overall interest fees you’re being charged. Freeing up this cash improves your overall financial health which is reason enough to focus on this goal.

You need to make a plan to pay off your debt to ensure you’re heading on the right track. There are many different debt strategies out there. One isn’t necessarily “better” than the others.

The debt avalanche and snowball are two accelerated debt repayment methods that are used often. Using the debt avalanche method, you list out all your debts by highest to the lowest interest rate. Then you make the minimum payments on all your debts, with the exception of the one with the highest interest rate. You pay as much as you can on this debt until it is paid off.

Afterward, you move to make these payments on the next highest interest rate. You’ll move on to the debt with the next highest interest after that and so on.

Conversely, the debt snowball method has you list out all your debts by their balances, from lowest to highest. You make minimum payments on all your debts, except for the one with the lowest balance. You focus on paying off this debt as fast as you can.

The debt avalanche method will save you the most on interest charges. However, this method may take longer before you start seeing success (paying off a debt).

Using the debt snowball method, you’ll start seeing this success sooner, which can keep you motivated. Choose the method that you feel will help you stick with your goal. You could also consider getting a budgeting app like YNAB or Personal Capital to help you organize your finances to determine the best method for paying off any debt.

Get a Secured Credit Card

Another way that to help your credit is by getting a secured credit card. With this type of credit card, you typically must put in a deposit of a few hundred dollars. This amount becomes your credit limit. Secured cards are easier to get with bad credit because they are less risky to issuers due to this deposit.

Use the card on purchases throughout the month. Make sure to keep your purchases below 30 percent of your credit limit. For example, if your credit limit is $500, you should keep your spending at or below $150 a month.

Pay off the entire balance each month so that you don’t accumulate interest charges. Make sure these payments are also on or before the due date. By doing this, you’ll build positive payment history which is a huge influence on your credit.

Anjana Paul

Anjana Paul is a financial writer with extensive education and experience in the financial industry. She received a Marketing and Management degree from Kansas State University and a Masters in Business Administration (MBA) from Baker University. Anjana also holds a Business Analytics Certificate from the Wharton School. Throughout her career, Anjana has worked in multiple roles within the financial industry. She has worked in banking, finance, student loans, consumer credit cards, and tech. Anjana's experience and education allow her to bring a credible, well-informed perspective to the content she writes at Wealth Pursuits, where her primary areas of focus include investing, credit, and personal finance.

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