Auto Loan Refinancing With Bad Credit

November 25, 2022 Auto Finance
Auto Loan Refinancing With Bad Credit

Paying off an auto loan with high interest rates and monthly payments can seem like it will never end -- especially when you are struggling to make those payments.

If this is a situation you are facing, you may want to consider auto loan refinancing. This can lower your interest rates or extend your loan term to help you pay off your loan faster, and even if you have bad credit, there are lenders who specialize in bad credit auto loan refinancing who can help you get the savings you need.

How It Works

Auto loan refinancing replaces your current loan with a new loan from a different lender, and usually with a lower interest rate and/or lower monthly payments. You can either keep the same loan term or choose to shorten or extend it.

The new loan amount is usually the same as the current balance you have left, although some lenders will allow you to take out cash. However, taking out cash could increase the chances of becoming upside-down (or owing more than the value of your car) on your loan since there isn't much equity in a car loan. It's best to avoid taking out cash unless you need the funds for an emergency and have already made a large down payment.

When To Refinance Your Loans

Refinancing an auto loan is a good idea if you are facing certain specific circumstances:

  • Your credit score has improved since you initially financed the vehicle and you may qualify for
  • You want to lower your APR
  • You want to lengthen your repayment period
  • Your current interest rates are higher than what you can pay
  • Interest rates drop or the interest you are paying is higher than the current average rate
  • Your interest rates were initially marked up by a dealer even if you could have acquired a lower interest rate somewhere else
  • You have contacted your lender but are unable to lengthen the loan term or reduce interest
  • You want to switch to a different lender
  • You want to borrow funds through cash-out refinancing
  • You can't keep up with your current payments
  • You are facing repossession

If you are close to paying off your loan or have an older vehicle with lots of miles on it, then you'll want to skip refinancing -- you may end up owing more than what the car is worth.

How To Refinance A Car With Bad Credit

You can refinance an auto loan with bad credit, but it can be a little more challenging.

Before applying, check your credit score and credit reports to search for any errors that may be damaging. You can order a free copy of your three-bureau credit reports once a year at AnnualCreditReport.com and check for inaccuracies either on your own or by using a reputable credit repair service; you can check your credit scores through a credit monitoring site.

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Your creditworthiness is one of the first factors lenders look into when deciding on whether they will lend to you and what terms and interest rates you receive. This is why it's important to build and improve your credit before applying.

Even if you have bad credit, your credit history should be clear of seriously damaging items such as [bankruptcy](/articles/(/articles/the-comprehensive-guide-to-bankruptcy) and it should show a history of on-time payments. Additionally, your credit score should be higher than what it was when you initially took out a loan.

If you are upside down on your loan (you owe more than what your vehicle is worth), it will be harder to refinance your loan since lenders look at the car's value is used to decide how much they will lend. In this situation, you can try to improve your loan-to-value ratio by making additional payments to your current lender or ask to reduce the length of the new loan term.

How To Apply

They may be difficult to find, but there are lenders -- banks, credit unions, and online networks -- that accept applications from consumers with bad credit.

Lending networks typically want a credit score above 500, but local banks and credit unions may work with you since they have a prior relationship with you.

A lending network is one of the quickest and simplest ways to apply. Filling out an application -- and receiving a decision -- usually takes a few minutes. Your completed form is submitted to a network of partner lenders who may offer you multiple loan offers. Once you choose an offer, you will be redirected to the lender's website, where you can complete the loan application.

Your new lender will then send funds to pay off your existing loan with your former lender, and you will begin making payments to your new refinancing company.

How Refinancing Impacts Your Credit

Applying for an auto loan refinance (or any other type of credit) generates a hard inquiry for lenders to see your credit history and damages your credit slightly. Inquiries remain on your credit report for two years but the negative impact of it lessens over time. A few inquiries are not a red flag to lenders, but too many inquiries indicate that you are desperate for funds.

When your previous lender pays off your old auto loan, they must report this payment to the credit bureaus. This can take up to 60 days for it to appear on your credit report and you may notice two outstanding debts until the then. Your credit may be damaged initially but will eventually improve once the loan payment is reflected in your credit file.

Auto Loan Refinancing Pros

  • Auto loan refinancing loans generally come with no prepayment penalties
  • You can lower the overall cost of a car loan by qualifying for lower interest rates and/or extending the loan term
  • Lenders may allow you to tap into your auto loan's equity and receive cash back to pay off your current debt and use the remaining cash for other purposes, such as paying medical bills or using it for an emergency
  • Online lending networks allow you to access multiple lenders with one single application and improve your chances of approval
  • You can change lenders if you are dealing with poor customer service

Auto Loan Refinancing Cons

  • Lenders may charge origination fees, closing fees, and other fees that can drastically increase the cost of your loan -- even if you qualify for lower interest rates. Always be sure to plan out the total cost of your loan before agreeing to the terms and see if it will really lower the cost of your loan.
  • Extending your loan term may lower your monthly payments but may result in you paying more in interest over the entire loan term. Additionally, you risk becoming upside-down on your loan and if your car is totaled in an accident, your insurance may not cover the full amount and you would still owe money on the loan.

The Best Auto Refinance Loans For Bad Credit

There are multiple lenders that can assist you even if you have bad credit. Auto Credit Express, for example, is a reputable lending network that provides auto loan refinancing and partners with over 1,200 lenders who can work with consumers nationwide who are dealing with bad credit, no credit, bankruptcy, or repossession. To date, they have closed $1 billion in bad credit auto loans since their start in 1999.

They offer a simple pre-qualification form and require that their applicants meet the following requirements:

  • Earn a verifiable $1,500 income every month
  • Owe less on your car than the current Kelley Blue Book value and owe an outstanding amount that falls in the new acceptable limits
  • Be current on your loan payments
  • Meet the lender's vehicle age and mileage requirements
  • Have a higher credit score than when you received the initial loan

Need more information on bad credit and auto loans? Look to our reputable services to learn more.

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What credit score is considered bad?

The majority of lenders use your FICO® score to determine whether you are a reliable or risky borrower. Your FICO® score is considered poor if it falls under 620.

How can I improve my credit?

  • Consider credit repair and contact a credit repair service
  • Always pay your bills on time
  • Deal with past due accounts
  • Reduce your credit utilization
  • Keep old credit accounts open
  • Open new credit (but avoid applying for too much new credit)
  • Monitor your credit

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