If you're considering refinancing your car loan, a low credit score can complicate the process. You may not qualify for a lower interest rate or lower monthly loan payments if lenders believe you are not a responsible borrower.
However, this does not mean that it is impossible to refinance a car loan with a bad credit score. Here are some tips to help you learn howrefinance a car loanwith bad credit.
Looking for a car loan that suits you? Simply compare the rates of lenders below.
How to refinance a car loan with bad credit
You can still refinance a car loan with bad credit, but it can be difficult to get a good interest rate. Borrowers with low credit generally pay much higher interest rates. If you have bad credit, you can use these strategies to refinance your car loan.
Check your budget
Start with a thorough look at your budget. Determine how much you can afford to spend on your car payment each month. Then use itonline auto refinance calculatorto estimate your new monthly payment based on your loan amount, current interest rate, current loan term and loan balance.
Factor in other costs, such as fuel, car insurance, and maintenance. These costs can quickly add up and exceed your total monthly car budget. Once youdetermine how much you can affordto pay off your new car loan, you can proceed to the following steps.
Check your credit score
Before applying for a new loan, it's a good idea to review your credit report. In addition to your score, you also want to look for incorrect information, such as an account that you have not opened. Dispute any mistakes you find, as they could hurt your score and prevent you from qualifying for a new loan.
Check all three reporting agencies for a complete overview of your credit. Most car loan lenders use Experian and Equifax, but you should also check your TransUnion file. There may also be an error in one agency's report that isn't reflected in another agency's report, so make sure all statements contain accurate information.
There is no minimum credit score that guarantees approval when refinancing your car loan. Some lenders have stricter requirements than others and some specialize in working with thempeople rebuilding their credit history.
However, if your goal is to get a lower interest rate, it helps to have a higher credit score when you refinance than when you took out the original car loan. You canrequest a free copy of your credit reportonce a year.
Knowing what's on your credit report also helps you set your expectations before you look for a loan. For example, if there's a chargeback on your credit report, consider looking at lenders that offer refinance loans for applicants like you.
If your credit score hasn't improved -- or has dropped -- since you took out your original car loan, you may want to reconsider refinancing now.
Contact the original lender
Before looking for a new lender, check with your existing lender, especially if your loan is in good standing. Your bank may be willing to refinance your car loan, especially if your credit score has improved.
However, not every financial institution will do that. And if rates have dropped, your original lender probably won't want to lose the extra money you pay in interest.
Shop around for the best deal
If you want to get a lower interest rate, consider looking for a new lender. Even if your original bank or credit union is willing to refinance your loan, getting multiple loan offers can help you get the best loan for your budget.
Don't just look at the monthly costs. You should also compare the interest rate, loan term, issuance and other charges.
Take the time to research your options, as even a 1-2% drop in your interest rate can save you a significant amount of money. For example, if you want to refinance your $36,000 loan over four years, you'll pay $5,379 in interest at 7% and only $3,795 at 5%. The total savings in this scenario is $1,584, or nearly $400 per year.
To minimize the impact on your credit score, ask any lender to soften your credit score. Even when they do a strict credit check, most scoring models count multiple credit checks of the same type as one survey, as long as they happen within a 14-45 day period. Questions related torefinancing shouldn't hurt your credit score, as long as you are within that time frame.
Collect your documentation
Once you choose the best loan refinancing offer, your lender will need several documents to complete the paperwork. While you wait for prequalification, here's the information you need to have on hand:
- Identification or driver's license.
- Proof of income, such as a pay slip.
- Vehicle identification number (VIN).
- Vehicle registration.
- Proof of insurance.
- Citizen service number.
- Payment summary from your current lender.
What is considered a bad credit score?
Credit score of579 or less is usually considered "bad".Most banks consider a score of 580 to 669 to be "fair," while anything above 670 is good, very good, or even excellent. Since each lender uses its own guidelines to determine your credit rating, a low score may meet the requirements of one company but not another.
Why should you refinance your car loan?
Even if you have bad credit, car loan refinancing can be beneficial. Here are some reasons why you should consider refinancing your loan:
You have a high interest rate
If car loan rates have dropped since you bought the car, refinancing may lower your interest payments. When researching lenders, keep in mind that new car loans often have different interest rates than refinances. Historical data can give you a general idea of where the market is headed, but you'll need to check with the banks directly for exact numbers.
You have a short-term loan
Perhaps you want a lower monthly payment, but you are not eligible for a lower interest rate. Then you may be able to free up some money by extending the term of the loan.
This strategy works well for most borrowers with short-term loans of less than two years. Stretching payments over three years or more reduces monthly payments.
Keep in mind that this option will likely cost you more in interest. If you decide to extend the term of your car refinance loan, consider making additional payments when you have more money on hand.
Factors affecting the possibility of automatic refinancing
In addition to bad credit, other factors can affect your car loan refinancing options. These are some of the factors that can affect your ability to refinance.
Requests for refinancing
Each bank has specific requirements that you must meet before they lend you money. These sometimes include how much money you still owe, how many months you have to pay, and the condition of your vehicle.
Most banks prefer to avoid small amount loans, so if you have six months or less to pay off, you may not be able to get approval even with an excellent credit score. Likewise, if your car is in poor condition or has high mileage, it's not worth much to the bank and they may miss the chance to refinance it.
Current arrival
One of the best ways to get approved is to increase your income. If your salary has increased since you took out your original car loan, your chances of a bad credit refinance increase.
On the other hand, if your income has dropped since you bought the car, that could be why you're looking for a new loan in the first place. If so, you could be stuck with a higher interest rate if you are approved.
The status of your original loan
If your original loan is a swap, finding another lender to take on the risk will be even more challenging than a low credit score.
If you are late on your payments, contact your lender. They can help get you back on track so you can consider refinancing options in the future.
What if you still can't qualify for a bad credit refinance?
Sometimes borrowers with bad credit just don't qualify for refinancing. If you find yourself in this situation, consider taking one of the following steps:
Ask someone to sign
If you're having trouble getting approved for a car refinance, you can ask someone to sign with you. Whether that person is a family member or friend, choosing someone with good credit can help you get a loan. Susigner can also help you qualify for a better interest rate.
Improve your credit score
Car borrowers use your credit score to determine if you will be a responsible borrower. You can significantly increase your chances of approval by improving your credit score. Here are some ways to improve your score:
- Payment history:Paying bills on time should be a priority, and consistency is key. Consider setting up automatic payments for monthly expenses that directly affect your score, such as car loans, mortgages, and credit cards.
- Debt amounts:Lenders want to make sure you don't overextend yourself with a refinance, so keep your debt amounts under 30% of your credit limit. If you're close to using your credit cards, stop using them and pay off your debts before applying for a new loan.
- Length of credit history:How long your credit file has been open isn't as important as other factors, but it still counts towards your score. If you have a credit card that you no longer use, consider keeping the account active.
- Credit combination:Having a diverse mix of credit accounts, such as car loans, mortgages, and credit cards, shows banks that you can manage many different types of debt. While this is another small factor that plays into your overall score, you should still keep it in mind.
- New Loan:When you open several new credit accounts in a short period of time, a lender may take this as a sign that you need to borrow money to stay afloat. Before applying for a new account, make sure the move will help - not hurt - your overall financial situation.
Get a side job
While an afterthought won't help you improve your chances of a bad credit refinance, it can improve your finances enough that you don't need to take out another loan. Paying off your car loan faster takes discipline and determination, but it is possible.
In addition, cutting costs, finding a part-time job, and sticking to a budget will help you put as much money into your debt as possible.
Return the car
You can always return the car to the seller if you have no other choice and can't make the monthly car payments. This step is called voluntary withdrawal. However, you won't necessarily be able to walk away freely and clearly. Moreover, your credit rating will undoubtedly suffer if you choose this option.
Refinancing a car loan with bad credit isn't always easy, but it can be done. Before you decide to refinance, follow these tips to increase your chances of getting a new loan approved while proactively working to improve your credit.
Elizabeth Rivelli
Finance and Insurance Editor
Elizabeth Rivelli is a freelance writer with over three years of personal finance and insurance experience. He has extensive knowledge of various types of insurance, including car and non-life insurance. Her byline has appeared in dozens of online financial publications, such as The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
FAQs
Learn how to refinance a car loan with bad credit? ›
Can you refinance with a 500 credit score? You can refinance a car loan with a 500 credit score. However, since a 500 credit score places you in the poor credit category, you're likely to get high interest rates.
Can I refinance my car with 500 credit score? ›Can you refinance with a 500 credit score? You can refinance a car loan with a 500 credit score. However, since a 500 credit score places you in the poor credit category, you're likely to get high interest rates.
What is the lowest credit score you can have to refinance a car? ›There is no minimum credit score required to refinance a car loan. That being said, there is a range that is considered a “good credit score” to refinance a car loan. In general, a credit score over 700 will unlock the best interest rates, and a credit score between 660-700 will give you access to standard rates.
Can I refinance my car with a 550 credit score? ›Even with poor credit, it is possible to refinance your car loan for a lower interest rate or better terms. Doing so can help save you money in the long run, so it's worth reaching out to a company that specializes in helping customers with bad credit.
Does refinancing your car look bad on your credit? ›The short answer is yes—refinancing can negatively affect your credit score. When you refinance an auto loan, you must submit a new loan application, which results in a hard credit check.
How long should I wait to refinance my car with bad credit? ›If you've made consistent, on-time payments for six to 12 months since getting your car loan, and the lender has been reporting these payments to the credit bureaus, it's likely that your credit score has improved. It's worth checking to see if you might now qualify to refinance to a lower interest rate.
Can I finance a car with a 480 credit score? ›It's possible to get approved for an auto loan if you have bad credit (sometimes called "deep subprime" credit), meaning a credit score under 580. But in many cases, options can be costly. To improve your odds of getting approved for a relatively affordable loan, follow these steps.
Is refinancing a car difficult? ›Refinancing a car loan is easier and faster than refinancing a mortgage, and none of the lenders we checked charge fees; you may still need to pay a small title transfer fee imposed by your state's Department of Motor Vehicles. One thing to keep in mind is the earlier you refinance, the more you can save.
Does refinancing hurt your credit? ›Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months.
What's needed to refinance a car? ›- Proof of income.
- Proof of residence.
- Proof of insurance.
- Vehicle information.
- Current loan information.
How long does refinancing a car take? ›
Refinancing a car loan can take anywhere from two hours to two weeks. However, organizing your documents ahead of time can help speed up the process.
What credit score is needed to buy a car without a cosigner? ›In general, you'll need a credit score of at least 600 to qualify for a traditional auto loan, but the minimum credit score required to finance a car loan varies by lender.
Can I refinance my car with the same lender? ›Can I refinance my car with the same lender? Yes, many lenders will allow you to refinance your existing car loan. Keep in mind that lenders may not offer refinancing as an option. Especially if your vehicle is in poor condition, has low value, or you have few payments remaining on your existing loan.
What is the disadvantage of refinancing a car loan? ›Higher Interest Overall
Though one of the potential advantages of refinancing is a lower rate, you could end up paying more interest overall depending on the stipulations of your new loan. Specifically, if you decide to extend the term of your loan, you'll have more installments of interest along with monthly payments.
If you refinance to a longer loan term to reduce your payment, you may actually pay more overall because of the additional months of interest you pay.
Does refinancing start your auto loan over? ›The bottom line. You'll start from scratch with a new auto loan when you refinance and potentially get a lower monthly payment or interest rate. But before applying, consider the risks that come with refinancing. Look for other ways to save money if refinancing isn't the best move for your financial situation.
How hard is it to get a car loan with a 500 credit score? ›| Credit score range | New car | Used car |
|---|---|---|
| Deep Subprime: 300 to 500 | 14.08% | 21.32% |
| Subprime: 501 to 600 | 11.53% | 18.55% |
| Near Prime: 601 to 660 | 8.86% | 13.28% |
| Prime: 661 to 780 | 6.40% | 8.75% |
| Sale Price | Percentage | Est. Down Payment |
|---|---|---|
| $15,000 | 10% | $1,500 |
| $20,000 | 10% | $2,000 |
| $25,000 | 10% | $2,500 |
| $30,000 | 10% | $3,000 |
A score below 620 is generally a bad score for refinancing. This is the minimum score required for most refinancing options. While you can still refinance with a lower score (with an FHA refinance, for instance, you need a minimum of 580), you will have fewer choices.
Can I finance a car with a 450 credit score? ›Auto dealers often have more flexible credit requirements than banks, credit unions, and third-party lenders, and may be more willing to work with borrowers who have credit scores of 400 to 450. But they also charge higher interest rates.