Refinance car loan with bad credit

Car loans allow consumers to purchase new or used vehicles immediately and pay off the high cost through convenient monthly payments. Unfortunately, many people end up with loan terms that don’t work with their finances. If you are having trouble keeping up with monthly payments, you may ask, “Can I refinance a car loan with bad credit?” Yes! You may be able to refinance your existing auto loan with Bad Credit Loans

Learn how the refinancing process works and what you need to qualify in this informational article. 

What Is a Refinance and What Are the Benefits?

A refinance, also known as a refi, is the process of replacing an existing loan agreement with a new one to get more favorable terms. When borrowers sign a new loan agreement, they agree to abide by the new terms and pay the new lender. 

Borrowers typically refinance for one of the following reasons:

  • To get lower interest rates.
  • To switch from fixed to variable interest rates.
  • To get longer repayment lengths.
  • To work with a new lender.

If you think refinancing your current car loan is an ideal financial solution, keep reading to learn about the benefits and how to start the refinance process.  

Lower Interest Rates

Interest rates significantly affect the cost of borrowing money. If the interest rate on a loan is too high, a borrower can lose hundreds or even thousands of dollars each year. For this reason, many people  refinance to get a lower rate. 

If your credit score has improved since you got your current loan, you may be eligible for the lowest rate a lender offers. If your credit score has since decreased, you may worry about qualifying for auto refinance loans. But bad credit refinancing options are available, so you may be able to secure new affordable loan terms. 

Switching from Variable to Fixed Rates

Auto loans either have fixed or variable interest rates. Some borrowers opt for a variable interest rate and then switch to a fixed rate. Variable rates frequently change, typically on a monthly, quarterly, or annual basis. While variable rates can potentially decrease significantly, they can also increase exponentially. Too often, borrowers end up with a monthly payment they cannot afford due to unpredictable interest rate changes. 

In contrast, fixed interest rates stay consistent throughout the repayment period. A fixed rate makes incorporating an auto loan payment into your monthly budget easy because you know exactly how much you will need to pay. Switching from a variable to a fixed rate may save you money and reduce your financial stress. 

A Longer Repayment Length 

The repayment length for auto loans typically lasts several years, which can result in lower monthly payments. But if the car’s purchase price is high, the monthly payments may also be high. If you are struggling to afford your auto loan, extending the repayment length through a refinance could help you get lower monthly payments.  

Keep in mind that extending the repayment length of a loan will cost more in the long run. However, if you are able to secure a lower interest rate, you may still save money. 

Switching to a New Lender

Not all financial institutions are the same, and you may be unsatisfied with the business hours or customer service quality. Working with a lender that values their customers’ satisfaction is critical. If you cannot contact your lender, you risk facing severe issues that cannot be remedied quickly or efficiently. Refinancing your loan allows you to switch lenders and potentially get a better customer experience. 

Do You Need Good Credit To Refinance Your Car Loan?

There is no universal minimum credit score required for a refinance auto loan. However, auto refinance lenders may have unique minimum credit score requirements for qualification. For this reason, it’s essential to inquire with multiple lenders. 

Although financial institutions claim they offer instant bad credit loans, they may only work with individuals that have scores higher than a specific score. For example, one lender may only offer loans for a 580 credit score or higher. Inquiring with multiple lenders can help you find the perfect lender that works with your current credit rating. 

Once you secure a new loan contract, ensure you make payments on time. Most financial institutions report your payment history to at least one of the three major credit bureaus. Maintaining a history of timely payments can help you improve a bad credit score over time. 

FICO scores are one of the most common credit scores financial institutions use. Take a look at how different financial categories make up your total credit score below: 

  • Payment History (35%)
  • Total Debt (30%)
  • Length of Credit History (15%)
  • New Credit Inquiries (10%)
  • Credit Mix (10%)

As you can see, payment history counts for 35% of your credit score. By making on-time payments every month, you may eventually see a positive effect on your credit rating. You can sign up for automatic payments to ensure you never make a late payment. Autopay deducts the loan amount directly from your bank account on the due date every month. But suppose you want to make payments manually. In that case, you can set up monthly alerts to get reminders via email or text message. 

How Do Borrowers Refinance Their Auto Loans?

The refinance process is similar to applying for a new loan. The borrower must inquire with a lender and submit an application for funding. While some financial institutions allow their customers to refinance loans, many do not. You will likely have to find a new lender to finance your auto loan. However, you are not limited to refinancing with the same type of loan you have.

If you struggle to repay your auto loans, you can refinance with another loan option. Borrowers can refinance their auto loans using personal loans, home equity loans, and auto title loans.   

Personal Loans

A personal loan is a type of installment loan that gives borrowers a lump sum for emergency expenses. The money you borrow is paid back through loan payments on a specific date every month. Most lenders offer fixed rates, although some also provide variable options. 

Collateral is not typically required for funding, so you do not have to risk using a valuable asset to secure financing. Personal loans generally provide up to a few thousand dollars, which may be enough to refinance a car loan. Interested borrowers could get a personal loan from a bank, credit union, or online lender. 

The eligibility requirements vary per lender. When you apply for a personal installment loan, the lender will likely review your credit report, income, and existing loan contract. Many personal loan lenders may offer flexible qualification requirements, so you could secure a loan offer with bad credit history if you show proof of your ability to make monthly payments. Inquire with various lenders to find the best offer for a refinance loan. 

Home Equity Loan

The difference between an auto loan and a home equity loan is the type of collateral a lender requires. Auto loans use the car as leverage, while home equity loans allow homeowners to take out a second mortgage on their house. 

If you own a home and have sufficient equity, you could use that equity to secure thousands of dollars for an auto refinance loan. To determine how much you qualify to receive, a lender will take your home’s current market value and mortgage balance into consideration. To get an accurate estimate of your home’s value, the lender must conduct an appraisal of your property. 

Due to strict qualification requirements, the approval process for a home equity loan usually takes months! If you want to refinance as soon as possible, this loan option may not be suitable for your needs. In addition, carefully consider whether you are willing to risk using your home as collateral. If you cannot repay the loan due to unforeseen financial issues, you run the risk of foreclosure. 

Auto Title Loans

An auto title loan is similar to an auto loan but works differently. A title loan is a secured loan that uses the borrower’s car as collateral in exchange for financial relief. While borrowers can only use auto loans to purchase new or used vehicles, auto title loans do not have strict spending requirements. You can use auto title loans to pay for various unexpected expenses or refinance a car loan. 

Suppose you are able to obtain enough money to pay off your current lender. In that case, you may be able to refinance with an auto title loan. The loan amount you qualify to get depends on the present value of your car and the amount of equity in it. Vehicles can have positive or negative equity. A car has positive equity when the current value is greater than the remaining loan balance and negative equity when the balance is more than the value.  

If your car is valuable and you have sufficient equity, you could qualify to refinance a car loan with an auto title loan. However, you should know that title loans are a high-cost option. While you could get a substantial loan amount quickly, the interest rates will likely be unreasonably high. In addition, you will still have to use the car as collateral. If you want to reduce your financial stress by refinancing, you may be better off using an unsecured loan. 

What Documents Do I Need for Auto Loan Refinancing?

The auto loan refinance process follows similar steps as applying for a new loan. Applicants must submit specific documents so a lender can verify their information. 

If you visit a brick and mortar, you will have to take your physical documents with you. But if you apply online, you can conveniently add that information to your application.. Online approval is typically quicker, and many online lenders offer instant decisions. 

Generally, you will have to submit the following information for a refinance loan: 

  • Government-Issued Photo ID — Most financial institutions will accept a state ID, driver’s license, or U.S. passport. 
  • SSN — You must submit your Social Security number (SSN) to apply for financing. However, specific lenders allow borrowers to provide an Individual Taxpayer Identification Number (ITIN) instead.
  • Proof of Address — The documents you can use as proof of address varies by lender. But usually, borrowers use utility bills, credit card statements, lease agreements, mortgage statements, etc.    
  • Proof of Income — While many lenders require paychecks as proof of income, you may be able to qualify with alternative documents. If the lender accepts alternative income, you could provide bank statements, invoices, tax returns, government award letters, etc. 
  • Current Loan Contract — You will likely have to provide the new lender a copy of your existing loan contract. If you have an electronic PDF copy, you can send or attach the file. But if you have a paper copy, you may take photos or submit it in person. 

Are There Any Disadvantages of Refinancing? 

Refinancing an auto loan could grant you various benefits, such as a lower interest rate or an extended repayment period. However, there are also some disadvantages to consider. Before submitting a loan application and replacing your current loan or lender, consider the following issues that may arise from refinancing a car loan. 

Credit Score Dip

When you submit a loan application, you allow a financial institution to conduct a hard credit check. A hard credit check deducts a few points from your total score and remains on credit reports for up to two years. Suppose you already have a bad credit score. In that case, it’s essential to know that it may decrease further by applying for an auto loan refinance. 

However, a small credit score decrease may be worth a refinance if you currently struggle to repay your existing car loan. As refinancing could make your monthly payments more affordable.  And even if your credit decreases, you could improve it over time. Your payment history affects your FICO score by 35%. If you avoid late payments on your new auto loan, you may start to see a positive effect on your score within a few months.  

Penalty Fees

Most  financial institutions charge penalty fees if a borrower strays from their agreed upon loan terms. However, the type of fees and costs vary. One standard penalty fee you can expect from every lender is a late payment fee.

Another penalty could be for paying a loan early. Lenders make money through interest fees. If you repay a loan a few months early, the lender receives less capital than expected. To combat this possibility, some lenders charge prepayment penalty fees. A prepayment penalty, also known as an early payoff fee, is typically a percentage of the outstanding balance. If you borrow a large sum of money, then your penalty fee may be worth a significant chunk of change. If you want the financial freedom of repaying your auto loan early, ask about prepayment penalty fees before applying with a lender.    

How To Refinance Your Car Loan in Four Steps

Refinancing your current auto loan could help you obtain better loan terms that reduce your financial stress and potentially save money. The refinance process is generally straightforward, as most financial institutions follow the same basic steps. If you want to apply for a refinance auto loan, follow these four steps:

Step One: Find a Refinance Lender

The first step is to find a refinance lender. You can find a lender online or work with a local one that has a nearby store location. Online lenders are safe to work with, but confirming their legitimacy is essential. 

Here are a few tips to check if a loan company is legitimate:

  • Check the Better Business Bureau (BBB) website.
  • Read online reviews on Google or Yelp. 
  • Check with your state’s attorney general to confirm the lender’s registration. 
  • Verify the address and contact information. 

Shopping around for a lender is encouraged because settling for the first offer you get means you risk missing out on better offers. When you prequalify for a refinance loan, pay close attention to the loan amount, annual percentage rate (APR), and fees. 

Step Two: Submit Your Documents

Once you find a lender you want to work with, you can start the approval process. You will have to submit basic information to get financing, such as your name, date of birth, address, SSN, etc. The documents you must provide vary, but you will likely have to show proof of your identity, address, and income. If you apply with an online lender, you may not need documentation, as the application may cover specifics.. But borrowers that want to apply in person may have to take their physical documents to the store location. 

Step Three: Complete the Approval Process

Once your information is verified, the lender will grant approval and draw up a contract. Ensure you take time to read through the loan agreement, no matter how mundane it seems. Reading the terms and conditions helps you avoid unexpected fees and penalties. 

Pay attention to the following details before you commit to a short or long-term contract:

  • The monthly payment amount.
  • The monthly due date.
  • The repayment duration.
  • The borrower fees.
  • The interest rate terms.

Step Four: Sign the New Loan Agreement 

Once you are confident that you are making a sound financial decision, you can go ahead and sign the loan agreement. After signing, the lender will disperse your funds. Most financial institutions provide direct deposits, so you can get your money the same day! 

How Often Can Borrowers Refinance a Car Loan?

Suppose you want to refinance your auto loan but are hesitant about switching lenders. In that case, you may wonder, “How many times can you refinance a car?” There is no exact number, as borrowers can technically refinance multiple times. 

Any borrower that is unsatisfied with their current loan terms can refinance. However, you must meet the qualification requirements with a lender to do so. But if your car is valuable with sufficient equity, and you have access to a reliable source of income, you could be eligible for a refinance loan. However, remember that applying for multiple loans can negatively affect your credit score. If you switch lenders numerous times, you could see a significant decrease in your credit rating.  

In addition, remember that extending the repayment length of a loan by refinancing could cost you more. Although you may receive lower monthly payments due to a repayment extension, you will ultimately pay more interest fees. Consider whether the long-term cost of a loan refinance is worth it. In certain instances, borrowers may be better off sticking with their current loan agreement.  

The Bottom Line: Auto Loan Refinancing With Bad Credit

It is possible to refinance a car loan with bad credit! Many financial institutions offer flexible qualification requirements and competitive rates for low-credit borrowers. To find the perfect loan offer for your current financial situation, inquire with multiple lenders to compare loan terms.