If you’re having trouble making your monthly car payments due to rising costs, increased car insurance premiums, or unexpected expenses, refinancing your auto loan may offer some relief. However, if you have a bad credit score, you’re unlikely to qualify for a competitive annual percentage rate (APR), and the costs of refinancing may outweigh the benefits.
You can still refinance your car loan if you have bad credit, but it can be more difficult and much more expensive. Lenders may require that you have a lot of equity in your vehicle, be newer, or have low mileage. You may also have to meet more stringent debt-to-income (DTI) ratio requirements than borrowers with better credit.
Steps to refinance a car loan with bad credit
Just like buying a new or used car, the process of refinancing a bad credit auto loan requires more forethought. If your car doesn’t meet bad credit financing requirements, you don’t want to waste your time shopping around with lenders.
If you decide to move forward, the process for refinancing your car loan is pretty much the same whether you have good or bad credit. First, consider the advantages and disadvantages of refinancing, review your financial situation, and then decide on a lender.
1. Research common requirements
If you have a bad credit score, standard loan-to-value (LTV) ratios, mileage, and vehicle refinance requirements may not apply to you, but lenders may not be upfront about that online. Contact customer service by phone or email to speak with a representative and ask your questions.
Here’s what you need to know before following the steps:
- What is the minimum and maximum amount I can borrow if I have bad credit?
- What is the maximum LTV ratio?
- How much equity do I need in a car?
- Are there any restrictions on make, model, year, or mileage requirements?
Even for borrowers with good credit, lenders typically limit refinancing to vehicles that are less than 10 years old or have fewer than 100,000 miles.
You may also have a hard time refinancing a salvage title vehicle because you have to meet standard title requirements. You may also need a lower LTV to give your lender more equity if you default and need to repossess your vehicle and resell it.
2. Check your credit score
Your credit score determines your interest rate, loan amount, loan terms, and sometimes vehicle approval requirements. Unscrupulous lenders set different standards and interest rates to offset the perceived risk of not being able to repay the loan.
Before you start refinancing your car loan, check your credit score and credit report to avoid any surprises. If you notice inaccurate or outdated information, immediately dispute it with the credit bureaus at Experian, TransUnion, or Equifax. And if possible, wait to refinance until your credit score improves. This can result in lower interest rates and a better overall deal.
3. Apply for a new loan
Before you submit your loan application, gather all the documents your lender will need to speed up the review process. You will typically need the following items:
- Vehicle mileage, make, model, and VIN.
- Proof of income and residence.
- Information regarding your current car loan.
- Estimated car loan repayment amount.
- Existing car insurance policy.
When applying, be as accurate as possible about your income to avoid rejection later. Lenders will review the information you provide and may request additional information to approve your loan if you have bad credit. If you are self-employed or have variable income, you may be required to provide additional documentation.
Once you get several estimates, compare the total cost and monthly payments to determine whether refinancing makes sense. Use Bankrate’s auto loan refinance calculator to estimate your potential savings. Refinancing generally only makes sense if you want to save money on interest or lower your monthly payments.
4. Complete the loan
Check your loan documents to make sure the terms and conditions match what you reviewed during your pre-qualification. If everything is correct, most lenders will allow you to electronically sign documents to complete the transaction. The new lender will transfer the loan amount directly to your current lender to repay the original loan.
Check with your lender to find out when payments will start. From here, follow your new monthly payment schedule until you pay off your refinance loan.
Financial companies that refinance car loans with bad credit
Most major banks and credit unions only offer auto loan refinancing to borrowers with at least fair credit. Traditional lenders are unlikely to accept bad debt, although some may make exceptions if there is a long-standing relationship. Marketplace lenders, a service that aggregates online lenders for borrowers with bad credit, work with multiple financial institutions to help people get loans.
These marketplace sites, currently featured on Bankrate, offer options to refinance from bad credit. Many companies will accept scores below 620, but you should expect higher interest rates and less favorable terms.
Should I refinance a car with bad credit?
Although refinancing with bad credit can involve significant risks, you can benefit most from refinancing if your credit score is in the good to excellent range. However, there are times when it makes sense to refinance a car loan with bad credit.
Alternatives to refinancing your car loan
If you decide that refinancing your car loan isn’t a wise financial move until your credit score improves, there are other options available.
- Let’s trade it in. Depending on the value of your car and your current loan balance, you may be able to trade in your car for a more affordable option and roll the outstanding balance into a new long-term loan. Keep in mind that rolling over your balance could turn your next loan upside down.
- Please request a change. If your current lender won’t refinance your loan or doesn’t offer it as an option, you can request a loan modification. This allows you to adjust your payment terms and possibly your interest rate without going through a new application process. However, you may have to miss payments to qualify for this option, which could further damage your credit.
- Defer payment. This is only available if you are facing short-term financial hardship, but it is an option. You may be able to skip up to three months of payments, but they will continue to add and accrue interest until the end of your loan.
- Adjust your budget. Until you qualify for refinancing, review your spending plan to make your payments more affordable. You should also improve your credit score in the meantime to get a better interest rate when applying for a new loan.
- Use a joint guarantor. Do you have a trusted friend or family member with strong credit? Adding them as a cosigner will improve your odds of approval and potential interest rate. Be sure to explain the risks and get permission.
conclusion
Unless you’re experiencing financial hardship, refinancing a bad credit car loan is usually a risky option. If you decide to refinance with a longer term to reduce your payments, remember that you can always make additional payments to shorten the term if your financial situation improves. If you bought too much of a car for your income or budget, it may be wise to trade it in and downsize to something more affordable.