More Americans are falling behind on their car loan and credit card payments than at any time in more than a decade.1 If you are having trouble repaying your car loan, you may type “Refinance car loan bad credit” on Google. Your search will tell you that it’s possible to refinance existing auto loans with bad credit loans!
Learn how the refinancing process works if you have a bad credit score and what you need to qualify in this informational article.
What Is a Refinance and What Are the Benefits to a Credit Score?
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 with bad credit scores typically refinance for one of the following reasons:
- To get lower interest rates
- To switch from a fixed to variable rate loan
- 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 car 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 bad credit borrowers opt for a variable interest rate and then switch to a fixed rate. Variable rates frequently change, typically monthly, quarterly, or annually. While variable rates can potentially decrease significantly, they can also increase exponentially. Too often, borrowers end up with a payment amount 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.
Remember that extending a loan’s repayment length will cost more in the long run. However, if you can 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 who meet their credit score requirements. 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:
| Factor | Weight in FICO Score | Description | How to Improve |
| Payment History | 35% | Records of your payments on credit cards, mortgages, and other loans. | Pay all your bills on time. Set up automatic payments or reminders. |
| Credit Utilization | 30% | Ratio of your current credit card balances to your credit limits. | Keep balances low on credit cards. Aim for a utilization rate below 30%. |
| Length of Credit History | 15% | How long your credit accounts have been active. | Don’t close old accounts unless necessary. The longer your credit history, the better. |
| New Credit Inquiries | 10% | Number of recently opened credit accounts and the number of recent inquiries into your report. | Limit the number of credit applications. Each inquiry can slightly lower your score. |
| Credit Mix | 10% | Variety of credit accounts like credit cards, retail accounts, installment loans, etc. | A healthy mix of different types of credit can be beneficial, but don’t open accounts you don’t need. |
How Do Bad Credit Borrowers Refinance Their Auto Loans?
While some financial institutions allow their bad credit 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 and maintain a good credit score, you can refinance with another loan option.
Personal Loans
A personal loan is a type of installment loan that gives borrowers a lump sum for emergency expenses. Collateral is not typically required for funding, so you do not have to risk using a valuable asset to secure financing.
The eligibility requirements vary per lender. When you apply for a personal loan, the lender will likely review your credit score, report, income, and original loan contract. Many personal loan lenders may offer flexible qualification requirements, so you could secure a loan offer with a bad credit history.
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. However, 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.
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.
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.
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.
Generally, you will have to submit the following information for a refinance loan:
- Government-Issued Photo ID
- SSN
- Proof of Address
- Proof of Income
- Current Financial Contract
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. Refinancing could make your monthly payments more affordable. And even if your credit score 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 types 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 loan 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 a Car Loan With Bad Credit
Refinancing your current auto loan could help you obtain better loan terms that reduce your financial stress and potentially save you money. The auto refinancing 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 of auto refinancing is finding a new 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 submitting basic information and documentation. If you apply with an online lender, you may not need documentation, as the application may cover specifics. However, borrowers who want to apply in person may have to take their physical documents to the store location.
The documents you must provide vary, but most lenders ask for the following:
| Document Type | Example |
| Government-Issued Photo ID | Driver’s license, passport, or state-issued ID card |
| SSN or ITIN | Your SSN card or ITIN documentation |
| Proof of Address | Utility bill (e.g., electricity, water), lease agreement, or mortgage statement |
| Proof of Income | Recent pay stubs, statements from banks or credit unions showing regular deposits, or tax returns |
| Current Loan Contract | A copy of your existing auto loan agreement with lender’s name, account number, loan balance |
| Credit Report | A recent copy from one of the major credit bureaus (Equifax, Experian, or TransUnion) |
| Vehicle Information | Vehicle Identification Number (VIN), make and model, and current mileage |
| Insurance Information | A copy of your current auto insurance policy |
| Employment Verification | Employment contract, recent pay stubs, or a letter from your employer |
| References | Names and contact information of personal or professional references |
| Co-Signer Information (if applicable) | Co-signer’s government-issued ID, proof of income, and credit report |
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 amount
- The monthly due date
- The repayment duration
- The loan 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 Car Loans?
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 who 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 credit score decrease.
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.
FAQs on Auto Refinancing With Poor Credit
While having a poor credit score may limit your options, it’s not impossible to secure a lower interest rate. Some credit unions and specialized lenders offer auto refinancing options specifically for those with bad credit.
Refinancing involves a hard credit check, which can temporarily lower your credit score by a few points. However, if refinancing leads to a lower monthly payment that you can manage easily, it could positively impact your credit score in the long run.
Your current lender may offer you the convenience of a streamlined process, but it’s always a good idea to shop around. Credit unions and other lenders may offer more favorable terms, especially if you’re aiming for a lower monthly payment or interest rate.
Approval largely depends on the lender’s criteria and your financial situation. While having poor credit may make it more challenging, there are lenders willing to refinance a loan with bad credit. Make sure to compare multiple offers to find the best fit for you.
In most cases, the car itself serves as collateral for the loan, just like with your original loan. However, some lenders may have different requirements, especially if you have bad credit.
Refinancing to a shorter term usually increases your monthly payment but can save you money in interest over the life of the loan. However, if your main goal is to lower your monthly payment, extending the loan term is a more likely option.
Generally, you’ll need proof of income, a government-issued ID, and details about your current loan. Some lenders may require additional documentation, especially if you have bad credit, to assess your ability to manage the new loan.
The Bottom Line from CreditNinja
It is possible to refinance an expensive car loan with bad credit and save money. In 2021, car loan borrowers who refinanced saved more than $92 monthly!2
CreditNinja offers flexible repayment plans and competitive rates on personal installment loans. If you have a bad credit score but want to refinance, know that we consider various factors for qualification! A good or excellent credit score is not the sole qualifying factor for a fast personal loan. Still not convinced? Read some of our online reviews from past satisfied customers!
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