Auto refinancing with bad credit is possible. If lower interest rates, better payment terms, affordable monthly payments or the possibility of putting off your next car payment for a month or two sound good to you, then you should definitely keep reading and find out more about auto refinance with bad credit!
Did You Know You Can Do Auto Refinancing With Bad Credit?
Many factors contribute to bad credit. Maybe you had a job change or loss that impacted your ability to pay your bills, made some bad financial choices or underestimated your ability to afford the payment. Even a lack of credit can give you a low credit score, like only having one credit card or just not having enough time to build your credit history.
The truth is, a new loan could actually make your car payment more affordable and help you get on the path to improving your credit. Whatever the reasons for your credit score, the most important thing is to know your options.
When to Refinance Your Loan
Regardless of your credit score, there are certain situations where refinancing makes more sense or can help you meet different goals. Refinancing is likely a good financial decision if:
- Interest rates dropped: If interest rates were high when you initially took out your loan and they’ve since dropped, you may want to consider refinancing. Doing so could land you a lower interest rate, saving you money over time.
- Your credit has improved: Because your credit score is one of the biggest factors affecting your loan eligibility and interest rate, a credit score improvement could help you secure lower rates and better loan terms. Making on-time payments can help improve your score — any improvement can help make a difference.
- You can’t make your current payments: Refinancing can make your payments more affordable if you’re struggling to afford your current monthly payment. Getting a lower interest rate can also reduce your monthly payment. Otherwise, you can refinance with a longer repayment period to lower your monthly payments. While this means you may be paying more in interest over time, you’ll be able to afford your payments from month to month.
- Your car is still valuable: Cars depreciate or lose value over time. The older your vehicle is, the less it’ll be worth, and the harder it’ll be to get a new loan on it. If your car still has significant value, you’ll likely get better rates and a higher loan amount.
- You financed through a dealership: Many dealerships offer financing to car buyers with bad credit. The rates and fees are typically marked up, which means refinancing could allow you to find a loan with a better lender.
Benefits of Auto Refinancing With Bad Credit
Auto loan refinancing can be extremely beneficial for those with bad credit. Refinancing is a way out of a loan with unfavorable terms and rates. Here are a few ways you may benefit from auto refinancing with bad credit.
Lower Your Car Payments
Refinancing your car can mean a lower interest rate and increasing the length of time to repay your loan. Both translate to lower monthly payments, which can make a significant difference when it comes to your monthly budget. Rather than needing to pay more than you can on your car loan or potentially miss payments on your loan or other bills, you’ll have more money to help you cover other expenses.
Bonus: when your car payment is affordable, it drastically reduces the likelihood of missing any of your future payments. When you don’t miss a payment, it can help improve your credit score!
Improve Your Credit Rating
A subprime loan is for people with bad credit and low FICO scores. For many people, it is the only way to get financing for a large purchase like a car when most other lenders will decline the applications.
Typically, a subprime loan has a higher interest rate because the loan carries more risk for the lender. But the good news is that when you make your payments consistently, a subprime loan can help people with bad credit improve their credit ratings and FICO scores. The higher your credit score goes, the higher the likelihood of being approved for a lower interest rate on a future loan.
If you already have a subprime auto loan, we may have good news for you. Your FICO score may have gone up if you paid all your payments consistently for the past year! If it is 600 or higher, you may very well qualify for a new loan at a lower interest rate!
Build up Your Savings
Hopefully, refinancing your auto loan will allow you to put a little more money into your savings. Unexpected expenses, whether they are personal, home, family, auto, major or minor, come whether you can afford them or not. Additionally, you likely have other bills you must pay monthly — rent or mortgage, utilities, groceries and other necessities require money in the bank. Having a little more savings makes an enormous difference.
Take a Break From Your Car Payments
When you refinance your loan, it takes a while for your application to be processed and your new loan to go into effect (up to 60 days in some cases). Since your first payment is not due until then, you very well could end up not having to make a car payment for one or even two months! Having a month or two off from your loan payments can also help you save money or focus on other financial needs. Learn about how you can take a vacation from your car payment.
Take out Some Cash
If you want to take cash out against your vehicle’s equity to meet unexpected expenses like medical emergencies or losing your job, seriously consider refinancing your loan.
A cash-out refinance allows you to get a new loan in the amount of your car’s full value. Your new loan will pay off your old one, and if there’s any money left in the loan, you can get that as cash back. For example, if your car is valued at $12,000 and you owe $8,000 on your old loan, you could have up to $4,000 in your pocket after the new loan pays off the old loan. Just remember you have to make payments on the entire $12,000.
Learn more about getting cash back from the equity in your car.
Own Your Car
If you want to go from leasing to owning the car, refinancing is a great way to make the transition. Whether you’re at the end of your lease or somewhere in the middle of payments, turning the residual amount, including anything you still owe, into an auto loan can help you buy out your lease. Then, you’d own the car and simply make payments on the new loan. You may even be able to get lower rates or monthly payments.
Learn more about buying out your lease.
How to Refinance a Car With Bad Credit
After evaluating your financial situation, you may decide refinancing is a good financial decision for you. Refinancing requires some research since you have so many options. Start with these steps:
Check Your Credit Scores and Reports
As mentioned before, your credit score can affect your ability to qualify for a loan. Before you apply for refinancing, you should check your credit scores and reports. Checking your scores and reports allows you to find and dispute any errors or inaccuracies that could negatively impact your score.
Checking your credit score and report also helps you set expectations regarding what type of loans you may qualify for. This is especially important if you have bad credit. Some lenders require certain credit scores, which means you may not be eligible for some loans. Knowing your credit score ahead of time can help narrow your search to lenders that will work with you. You’ll save yourself time and effort when you know what to expect.
Research Lender Options
Once you know your credit score and your credit reports look accurate, it’s time to begin researching different lenders. Refinancing is widely available, and every lender is different, so your choices will likely vary significantly. Because there are so many options available, it’s best to shop around, research and compare your top options to ensure you’re getting the best loan for your situation.
You may start your search with your current lender. While not all lenders are open to refinancing their own loans, some may be willing to do so if your credit score has improved or rates have lowered. If your current lender is willing to refinance your loan, use their potential rates and terms as your baseline for comparing other lenders. You’ll want to gather information to compare — most importantly, consider interest rates, monthly payments, loan terms, potential fees and penalties.
Credit unions and banks may be good options, though remember to check with online lenders too. Many online lenders will help you find loan options regardless of your credit score.
Apply for a New Loan
Once you’ve narrowed your options to a few ideal choices, your next step should be applying for new loans. Gather the necessary documents and information, including proof of income and information regarding your car and current loan. Once you start applying for loans, you can get prequalified for a loan, which will give you a more accurate look at your potential loan terms.
Once you’re officially approved for a loan, carefully review the terms and ask any necessary questions. After everything is finalized, your existing car loan will be paid off, and you’ll start repaying the new one.
Refinance Car Loan With Bad Credit FAQ
Still have questions about auto refinance and bad credit? Here are the answers to other frequently asked questions:
- Can you refinance a car loan with bad credit? Yes, refinancing a car loan is still possible for people with poor credit. Refinancing can even be beneficial if you have bad credit, especially if you find the right lender and loan.
- What credit score do you need to refinance your car? Every lender has different requirements for refinancing eligibility. There’s no universal minimum credit score needed to refinance your car — you just need to find a lender that caters to applicants with bad credit.
- How soon can you refinance a car loan with bad credit? Technically, you can refinance your car loan as soon as you get approved by a lender. Some lenders have no waiting period after a car is purchased, while others may require your existing loan to be open for at least six months. Regardless, you may benefit from waiting six months to give your credit score time to recover from any drops during credit checks.
- What happens to your credit score if you refinance your car? When you apply for refinancing, lenders will pull a credit check that can temporarily reduce your credit score. After a few months of timely payments, your score should return to normal and may even increase.
- Is having bad credit a common problem? Having less-than-perfect credit is more common than you think. If your credit score is in the low 600s or lower, your credit is considered poor. Luckily, there are many ways to boost your credit score.
Find a Better Auto Loan With RefiJet
Many people don’t know that refinancing their auto loans is even an option for people with bad credit. Learn more about our auto refinance eligibility requirements.
Check out our Auto Refinance Calculator to see if you could get a better auto loan.