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There's no universal minimum credit score required to refinance your car loan, so it may be possible to get approved with bad credit. But just because it's possible doesn't mean it's a good idea.
Even if your current loan terms are unfavorable, there's no guarantee that you'll qualify for a better rate or a lower payment. In most cases, it may be a better idea to work on improving your credit before refinancing your car loan. Here's what you need to know.
How to Refinance a Car Loan With Bad Credit
Building your credit can take time, and if you need better terms now, it could be worth it to see what's available. Here are the steps you can take to refinance your car loan.
1. Research Potential Lenders
While there are auto lenders willing to work with bad-credit borrowers, they can be difficult to find. Take your time to research lenders online to get an idea of which ones offer good approval odds.
Also consider contacting your local banks and credit unions to see what your options might look like.
Note that lenders will also have other eligibility criteria beyond your credit score. If you have an older vehicle, for instance, you may have even fewer options from which you can choose due to mileage or age limits.
Learn more >> How to Refinance Your Car Loan
2. Compare Rate Quotes
Once you have a list of lenders to work with, see if you can get prequalified with each one to get an idea of what your loan terms might look like. This process typically doesn't involve a hard credit inquiry, so it won't have an impact on your credit score.
In addition to the annual percentage rate (APR), it's a good idea to consider monthly payments, potential fees—including possible prepayment penalties—repayment terms and the lender's policies for delinquencies and loan default in the event that you can't repay the debt. All of these factors can help you decide whether refinancing your car will make financial sense for you.
Learn more >> Ways to Pay Less Interest on a Car Loan
3. Submit an Application
Now that you've narrowed down your list of options to a single lender, you can typically submit an application through the lender's website, over the phone or in person.
You'll likely need to provide information about yourself and your vehicle, including a 10-day payoff statement and the contact details for your current lender.
4. Review the Loan Agreement
If you're approved for a car refinance loan, carefully read the loan agreement to ensure you understand all the terms and conditions. If you can get better loan terms than what you currently have on your existing loan, you can choose to accept the loan. Otherwise, it may make sense to improve your credit score before you apply again.
Potential Downsides of Refinancing With Bad Credit
Even if you can qualify for an auto refinance loan, you may not want to go through with it until your credit is in better shape. Here are some of the potential drawbacks of refinancing with bad credit that could make your situation worse:
- It may increase your monthly payments. Depending on your current loan's interest rate compared with the new one, your monthly payment could end up higher instead of lower. That could make it difficult to keep up with payments.
- It could become costlier. Even if you qualify for a lower rate and monthly payment, the loan could become more expensive if you extend your repayment term beyond its current end date.
- You could lose your car. If your new monthly payments are so unmanageable that you miss payments and ultimately default on the loan, the lender will typically repossess the vehicle and sell it at auction.
Learn more >> When Should I Refinance My Car Loan?
Alternatives to Refinancing Your Car Loan
Depending on your reasoning for refinancing your car loan, it may be worth considering other options to meet your needs:
- Contact your lender. If you're thinking about refinancing because you can't afford your monthly payment, you may consider contacting your current lender to see if you can get some relief in the form of a short-term deferment or a loan modification.
- Trade in your car. If your monthly payments are too high, another option is to trade it in for a less expensive vehicle. That said, this may only make sense if you have positive equity in the car—meaning it's worth more than what you owe. If you have negative equity, rolling the remaining balance into the new loan could result in a higher payment.
- Consider a different loan option. If you're thinking about a cash-out refinance loan to tap some of the equity in your car, you may consider other options, such as an emergency loan. You could even ask a family member or friend to help you qualify for a low-interest personal loan as a cosigner.
Learn more >> What Is a Cash-Out Auto Refinance?
How to Improve Your Credit
Here are some ways you can improve your credit score before you apply to refinance an auto loan:
- Make all payments on time. The most important factor in your FICO® Score☉ is your payment history, so make it a priority to pay all your bills on time. If you have any accounts with past-due payments, get caught up quickly to avoid further damage to your credit score.
- Pay down credit card debt. Another influential component of your credit score is your credit utilization rate, which measures the amount of credit you're using on credit cards against your total credit limit. The lower your card balances are relative to their credit limits, the better it is for your credit score.
- Get added as an authorized user. If you have a loved one who has a credit card they've never missed a payment on, ask if they'll add you as an authorized user. Once they do, the full account history will appear on your credit reports, which can help improve your credit score.
- Avoid unnecessary debt. Anytime you apply for credit, the lender is likely to run a hard inquiry, which can temporarily drop your credit score by a few points. Also, when you open a new credit account, it lowers the average age of your accounts, which impacts your length of credit history (another factor in your credit scores). As such, it's crucial that you avoid applying for debt unless you need it.
As you take these and other steps to improve your credit score, you'll have a better chance of getting approved for an auto refinance loan, as well as other loans.
Frequently Asked Questions
There's no standard minimum credit score to get approved for an auto refinance loan. Each lender has its own eligibility criteria, and some are willing to work with low credit scores.
Refinancing an auto loan can negatively impact your credit because it involves a hard inquiry when you apply, along with a new credit account, which can negatively impact your length of credit history.
That said, these effects are usually temporary, and as long as you work to develop good credit habits, including making auto loan payments on time, you can increase your credit score over time.
You typically don't need to put money down on a refinance loan, but lenders may want to see that you have equity in the vehicle. If you don't, a down payment may be necessary. Some lenders may also require a down payment to make up for a lower credit score.
Monitor Your Credit Regularly to Maintain a Good Credit Score
It's generally a good idea to build your credit before applying for a loan, but to avoid being in the same position later on, it's crucial that you continue to practice good credit habits to maintain that improved score.
One way to do this is to monitor your credit regularly. With Experian, you'll get free access to your FICO® Score and your Experian credit report, along with real-time updates when there are changes to your Experian credit report, such as new accounts, inquiries and changes to your personal information.
As you build your credit score and continue to monitor it, you'll have a better idea of what's impacting your credit score, so you can address potential problems quickly.