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Can You Refinance a Car Loan With Bad Credit?

Can You Refinance a Car Loan With Bad Credit?; If you have bad credit, it may still be possible for you to refinance your car loan. Learn more from Lantern by SoFi.
Nancy Bilyeau
Nancy BilyeauUpdated September 20, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Your car loan’s interest rate might be higher than you’d like, particularly at a time when inflation eats away at your paycheck.But if you had a “bad” credit rating when you got the car loan, that interest rate might have seemed like the best option you could get. If that’s the case, you might now be wondering whether refinancing your car with bad credit could be a more cost-effective move than keeping your current car loan.The answer is that sometimes auto refinancing with bad credit can actually be a good idea. But you should proceed with caution. Here, you’ll find out if and how to do it.

Introduction to Refinancing with Bad Credit

It’s possible to refinance a car with bad credit, but you might face some challenges along the way. Some refinance lenders, for example, may be unwilling to extend credit to borrowers with FICO® Scores below 580.Other lenders may offer subprime auto refinancing, but you might have difficulty refinancing a car if you’re currently in delinquency on your existing auto loan. Borrowers who fail to make required payments on their existing car loans may fall short of a lender’s minimum requirements for refinancing.Lenders generally offer their best terms and lowest annual percentage rates (APRs) to borrowers with excellent credit. You may secure better terms when auto refinancing with a cosigner, particularly if the cosigner has prime credit.Refinancing may be right for you if it lowers your car loan interest rate, but you may pay more interest over the life of the loan if you refinance with an extended term. Another potential drawback of refinancing is it typically involves a hard inquiry, which can remain on your credit report for two years and cause your credit score to drop several points.

Can You Refinance Your Car Loan Even If You Have Bad Credit?

When you think about how to refinance a car loan with bad credit, you probably wonder first of all if it’s possible. You may even have been thinking, Will refinancing my car hurt my credit score even more?The good news is that yes, you can refinance your car loan with bad credit. Doing so can be a good idea, especially if you can get a cosigner whose credit is in good standing, if your credit has improved lately, or if car loan interest rates have dropped.There are also potential downsides to consider, of course. You’ll want to be aware of the cost of refinancing a car, taking into account any fees or prepayment penalties charged by your current lender. And refinancing your loan may temporarily lower your credit score — usually for no longer than about one year.But overall, refinancing may be a way to lower your monthly auto loan payments, which could help you save money. Just remember it’s important to weigh the pros and cons of refinancing your car before you make the leap and sign up for a specific loan.

What Is a Bad Credit Score?

You’ve probably researched what is a good credit score and not been thrilled with the answer. No one enjoys having the word “bad” attached to a record of their finances. What must first be understood is that the definitions are bestowed by credit agencies.Three credit agencies — Equifax®, Experian®, and TransUnion® — collect and store the information that helps potential lenders or employers rate your reliability. When you request an increase on your credit limit, apply for a loan, or apply for a new rental home or a new job, your credit report will likely come into play.There’s no getting around the importance of credit. In the world of credit reports, “bad” is anything less than “good,” and it encompasses both “fair” and “poor.” And those two definitions cover a wide range. Trying to find an auto loan refinance for fair credit is different from searching for one when your credit is poor.There are variations among the credit agencies, but here are the most common numbers for the credit scores:
RangeCredit score
740–799Very Good

Is It Smart to Get an Auto Loan Refinanced With Bad Credit?

Financial advisors caution that someone with poor credit is unlikely to get an auto refinancing deal that will really help their situation. However, it might be possible to refinance auto loan debt with fair credit, which falls between 580 and 669.About 17% of Americans have fair credit with FICO Scores in this range, according to Experian. Applicants with this score are still considered to be subprime borrowers, meaning their credit standing is less than what is normally desired. So an auto loan for fair credit is by no means a sure thing, though they do happen. A cosigner with good credit can definitely help.Apart from the score itself, other conditions can play a role in the decision.Recommended: Debt-to-Income Ratio for Auto Loans Explained

Factors to Consider Before Refinancing with Bad Credit

Here are some important factors to consider before refinancing with bad credit:
  • There’s no guarantee you’ll be approved for auto refinancing
  • Refinancing can hurt your credit score if the lender does a hard inquiry
  • An auto loan refinance calculator can help you determine whether refinancing is right for you
  • Refinancing may be right for you if you can secure a lower interest rate
  • Extending your loan term may reduce your monthly payment, but your interest costs may increase
  • Refinancing for a shorter term may reduce your total interest costs, but your monthly payment may increase
  • You could borrow extra funds with cash-out auto refinancing depending on your equity in the car
  • It can be difficult to refinance an upside down car loan, which is when your outstanding loan balance is greater than the appraised value of your car
  • You may not be eligible for refinancing if you owe less than $3,000 on a car loan

When Should You Refinance Your Car?

How soon can you refinance an auto loan? The best time to refinance your car, even with bad credit, is typically when one of the following situations apply:
  • If your credit score has improved. It’s helpful to check your credit score periodically, which you can do through many credit cards and financial institutions, to see where you are. Refinancing a car when your credit score is trending up may help you refinance for a lower interest rate and better terms.
  • When interest rates are dropping. Whenever car loan interest rates are down could be a good time to refinance your car. This is especially true if you have a few years left on your car loan and you can lower the interest by a few points. Refinancing to a rate that’s lower by 2 or 3 percentage points could result in savings that will really add up over the length of your loan.
  • When your car’s value is still high. Check out sites like Kelley Blue Book or to see what your car’s current value is. If the car’s value has dropped significantly and you owe more than the car is worth, it’s usually not a good idea to refinance. If the car is holding its value, this may be a good time to refinance it, assuming that interest rates are lower than they were when you bought the car.
  • If you’re struggling to make your car payments. When your auto loan interest rate is very high and you still have a few more years left on the loan, refinancing could be an option to reduce your monthly payments and help free up some cash in your budget. You may want to seek out a service that will compare auto loan refinancing options for you.

Comparing Auto Loan Refinance Lenders for Bad Credit

When you’re considering whether to refinance auto loan debt with fair credit or even poor credit, here are some tips to keep in mind:

Compare Multiple Loans

Don’t automatically settle for the first loan. Research to find the ones to help you lower your car loan payments.

Examine the Interest Rates

This is a key point when comparing loans, especially when looking for an auto loan refinance for fair credit. You might want to look up what a good auto loan interest rate is these days. But remember you need to allow for your bad credit as well as factors like whether it’s for a new car loan, a used car loan, or a refinanced car loan.

Look at the APR

The lender should provide you not only with what your monthly payment would be, but also the APR. This figure explains what you will be paying above principal every year and includes not only interest but also any fees.

Consider the Length of the Loan

Your monthly payments and even your interest rate might seem a lot lower but you’ll also need to look at the length of your refinanced car loan. You don’t want to find yourself with extended car payments that go beyond your initial loan and don’t ultimately save you money. 

Make Sure You Can Afford It

A great interest rate won’t help you if you still can’t pay the monthly payments on the loan, so be sure you understand what the bill will be every month.

Ask About Promotions

First you might want to ask your current lender about refinancing and inquire about any promotions running. Take those numbers when you shop around with other lenders to see what they can offer you.

Be Careful with Subprime Lenders 

Lenders that specialize in refinancing for people with bad credit — particularly poor credit — may be appealing, but watch out. Some may be predatory and charge exorbitant interest rates. That’s another reason to be sure to do your research and compare options!

Avoiding Predatory Lending Practices

As mentioned above, you’ll want to watch out for predatory lending, including lenders that charge excessive rates and fees.Borrowers with deep subprime credit have an average 21.38% used car loan rate as of the second quarter of 2023, according to Experian. Predatory lenders may charge excessive or higher-than-average APRs to borrowers with credit scores between 300 and 500.You may refinance for a lower monthly payment, but be cautious of lenders that steer you toward long-term refinancing. Your total interest costs may increase if you refinance for a longer term.In general, paying off a car loan early can minimize your interest costs. But some lenders may charge prepayment penalties to discourage you from paying off debt ahead of schedule. Beware of lenders that charge prepayment penalties.

How to Improve Your Chances of Refinancing with Bad Credit

As mentioned earlier, there’s no guarantee you’ll be approved for auto refinancing. Applying with a creditworthy cosigner, however, may improve your chances of approval.Having bad credit doesn’t necessarily disqualify you from refinancing a car. Lenders may consider you for auto refinancing if you have steady income and a current car loan that’s not in delinquency or default.Making required payments on your existing car loan may improve your chances of getting approved for a refinance car loan, even if you have bad credit.

How to Refinance a Car Loan with Bad Credit

Here’s a step-by-step guide on how you can refinance a car loan with bad credit:
  1. Avoid delinquency. Continue to make required payments on your existing car loan as you explore potential auto loan refinance options.
  2. Seek cosigner. Consider applying with a creditworthy cosigner to help you refinance a car.
  3. Shop around. Search online and see whether you prequalify for refinancing.
  4. Compare rates. Find and compare prequalified rate offers from different lenders, including credit unions and private lenders.
  5. Gather documents. Have any necessary documents in hand, including your driver’s license and proof of car registration in your name.
  6. Submit application. Apply for the refinancing that’s right for you.
  7. Make payments. Pay any required fees and payments on your new auto loan refinance.

The Takeaway

It may be possible to refinance auto loan debt with fair credit if you research your options and find a reputable lender that will work with you. Refinancing to a better rate after your credit score has improved and the interest rates have decreased can save you money in the long run. Using a cosigner who is in good credit standing might help you get a better rate and lower your monthly car payment.As you’re researching your different auto loan refinancing options, Lantern by SoFi can help. You can fill out one simple form to access loan offers from multiple lenders in our marketplace.Lantern can help you compare prequalified rate offers in minutes.

Frequently Asked Questions

Can you refinance an auto loan with bad credit?
Where is the best place to refinance an auto loan with bad credit?
Is it smart to refinance an auto loan with bad credit?

About the Author

Nancy Bilyeau

Nancy Bilyeau

Nancy Bilyeau writes about student loans, mortgages, car insurance, medical debt and many other finance topics for Lantern. A veteran of the magazine business, she has edited stories on personal finance for Good Housekeeping and DuJour magazines and has written articles for The Wall Street Journal, Readers' Digest, Parade, Town & Country and Lifetime/A&E, among others. She is a graduate of the University of Michigan.
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