Guide: How to Refinance Auto Loans with Bad Credit


If you’re being buried by high interest rates due to less than stellar credit, you might be wondering if it’s even possible to refinance auto loans with bad credit.

While it’s not impossible to find auto financing for bad credit, it’s definitely harder to refinance car loans with bad credit. If you’re in that situation, you’re not alone. According to Experian, 20.8% of auto loans are held by consumers with subprime credit.

Before you refinance car loans with bad credit, you need to do your research and understand how the process works. Our article will show you not only how to refinance with bad credit, but what to watch out for while you’re finding a solution that works for you.

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Source: Bad Credit Auto Refinance

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Why You Should Consider a Bad Credit Auto Refinance

Just like people with excellent credit, consumers with bad credit need to consider all their options to make their money stretch. The decision to refinance with bad credit is one option for people who need more cash flow throughout the month.

Advantages of an auto refinance with bad credit:

  • Lower monthly payments by lengthening the loan term
  • Lower monthly payments by acquiring a reduced interest rate
  • Potentially lowering the overall cost of the car

However, consumers looking for auto financing for bad credit also need to be aware of the disadvantages. By researching what a bad credit auto refinance involves, you won’t have any surprises at the end.

Disadvantages of an auto refinance with bad credit:

  • Potential higher overall cost for the vehicle
  • Potential pre-payment penalties such as in a pre-computed loan where a borrower is required to pay back the principle plus the total interest, should you want to pay it off early
  • Fees associated with refinancing

While it seems counter-intuitive that a refinance on your car with bad credit would cost more overall, consider what happens during a refinance. Often the length of the loan term is extended, and though your monthly payments might be lower, you’re paying over a longer period of time, thus costing more overall.

There may be some fees charged by the lender for an auto loan refinance with bad credit, but the larger fee will likely be the title transfer imposed by the state. The fees vary from state to state, but it’s important to factor these into your overall cost.



When to Refinance Your Car with Bad Credit

Have you been asking yourself, “Is it time to refinance my car with bad credit?” There are certain situations where it makes more sense to take on a bad credit auto refinance than others.

It might be a good time to refinance an auto loan with bad credit if:

  • Your credit has improved
  • Your recent history shows on-time payments
  • Interest rates have dropped
  • You financed a car with an interest rate that was too high

According to one expert at Cars.com, if your credit score has improved by at least 50 points, you may be able to refinance car loans with bad credit. Often, creditors are more interested in the recent payment history of a borrower who wants auto financing for bad credit than they are in old payment patterns.

If you didn’t check your credit score before you originally financed the vehicle, you may have an interest rate that is too high. Lenders will almost always negotiate for the highest interest rate they can get, especially if you’re not educated about your own credit score and where you stand.

Credit scores of 500-600 are considered subprime, and scores from 300-500 are considered deep subprime. Make sure your interest rate is in line with interest rates used for people in your credit score range when you’re ready to refinance a car with bad credit.

When you’re seeking a refinance with bad credit, you need to know what the going interest rates are. Depending on when you want to refinance your car with bad credit, a drop in interest rates could make all the difference. One expert even suggests that reducing your annual interest payment by as little as 1% may still be worth investigating.

If your rate is above 21%, it’s probably time to consider a refinance.

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When Not to Refinance Car Loans with Bad Credit

While you may not want to refinance auto loans with bad credit due to the disadvantages of potentially higher fees and other associated costs, there are times when a lender is not likely to even approve such a loan.

It might be harder to refinance auto loans with bad credit if:

  • You are currently upside down in financing, meaning you owe more than the car is worth
  • Your car is more than 7 years old
  • If your vehicle has over 100,000 miles on the odometer

None of these factors by themselves will exclude you from securing an auto refinance with bad credit, but you may still be stuck with a higher interest rate or a longer-term loan.



You need to know what your vehicle is worth to determine if you’re upside down. Remember, the value of your car will go down faster than your loan balance, so when it’s worth less than you owe, a new lender will see it as a bigger risk.

You can check websites such as KBB.com (Kelley Blue Book) or AutoTrader.com to find out the value of your car before you talk to lenders so you will have an idea what to expect.

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Source: Auto Financing for Bad Credit

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How Do I Refinance My Car with Bad Credit?

Now that you are aware of the advantages and disadvantages of seeking to refinance a car with bad credit, as well as considering timing issues, you may be asking, “How do I refinance my car with bad credit?”

The process to refinance an auto loan with bad credit is the same as it is for consumers with stellar credit. Before you seek out a lender, it’s important to know all the terms and conditions of your current loan to determine if auto financing for bad credit is a viable option.

If you think you’re ready to refinance auto loans with bad credit, first determine:

  • If your current loan carries any pre-payment penalties or fees
  • What your credit score is, and if there are discrepancies that can be resolved
  • How much more you’re willing to pay for the vehicle, should you need a longer-term loan
  • If you need to refinance with a new lender, or if you can work with your current one

If the reason you’re looking to refinance a car with bad credit is because you can’t keep up with your car payments, you may be able to skip this process by working with your current lender. Accoring to one expert on CreditKarma.com, lenders will often try to find suitable solutions so you can avoid having to seek relief elsewhere.

If you’re thinking about an auto loan refinance with bad credit, make sure to discuss options with your current lender before you miss a payment. Once you start missing payments, your choices will continue to narrow.



Steps to Refinance Auto Loans with Bad Credit

To refinance auto loans with bad credit only takes a few steps, though it may take several tries to accomplish.

Gather Information

All lenders will need information on your current loan and the make, model, and mileage of the vehicle. Having all your paperwork and information in one place will help simplify the process, whether you’re going through a traditional brick-and-mortar bank or an online lender.

Shop Around

First, don’t assume that your subprime credit will automatically eliminate your chances of securing a refinance. There are a few options to consider:

  • Brick-and-mortar banks where you have an established history
  • Credit unions
  • Online lenders

When seeking to refinance car loans with bad credit, compare lenders to see who can offer the best interest rates and terms. A few places to look online include My Auto Loan, Capital One, and Auto Credit Express.

While seeking to refinance an auto loan with bad credit, you can see interest rates at Bankrate.com and Wells Fargo.

After Approval

If you’re approved for a bad credit auto refinance, your new lender will either send you a check to pay off the old loan or deal with the old lender electronically. From there, you are working with your new lender exclusively.



What Happens if an Auto Loan Refinance with Bad Credit Is Not Approved?

If you are unable to secure an auto refinance with bad credit, you need to work on repairing your credit.

  • Stay on top of your credit report by pulling it at regular intervals and resolving descrepencies
  • Establish a solid payment history on your current loan and all other bills for 6-12 months
  • Keep balances low on credit cards and other revolving credit
  • Work with other creditors to establish lower payments or interest rates, if possible

If all else fails, continue to work with your current auto loan lender. See what options they have available to either lower your interest rate or lengthen the term of the loan. Stay in contact with them throughout the process until you’re ready to start your search for auto financing for bad credit again.



Is Auto Financing for Bad Credit a Good Choice for Me?

The decision whether to refinance auto loans with bad credit is both personal and important. The best candidates to refinance a car with bad credit:

  • Have a current loan without pre-payment penalties
  • Own a vehicle that is less than 7-10 years old, with 100,000 miles or less
  • Are establishing a solid payment history with their current lender
  • Have an improvement in their credit score
  • Can handle associated fees
  • Have researched the pros and cons of an auto refinance with bad credit

Remember, not being an ideal candidate for auto financing for bad credit doesn’t automatically rule you out. According to Roadloans.com, banks have “sophisticated ways to lend you money for your refinance.”

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General Tips for Those Who Refinance Auto Loans With Bad Credit

No matter what your credit situation looks like, there are some things to keep in mind when dealing with car loans.

  • Pay your loan off as soon as possible by getting the shortest term you can afford
  • Make monthly payments on time, every time
  • If possible, make extra payments toward the principle so you can pay off the loan faster

Trying to refinance auto loans with bad credit will present challenges, but it’s still in your best interest to investigate your options. Familiarize yourself with the pros and cons of trying to refinance car loans with bad credit for your personal situation.

In some situations, it will lower a borrower’s monthly payments but cost them more over time. In other cases, a bad credit auto refinance will lower the interest payments and save the borrower hundreds if not thousands of dollars over the course of the loan.

Do your research, and hopefully you will be back on the road to saving money and establishing good credit.

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