Refinancing a car loan can decrease your interest rate, adjust your terms and save you money over the length of your loan. But if you’re stuck with bad credit, refinancing may be a bit more complicated.
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Why Refinance an Auto Loan?
The purpose of an auto loan refinance is to get a lower interest rate or adjust the terms of your current auto loan, allowing you to pay off your loan quicker or in a more manageable fashion. Lowering your interest rate could mean you allocate a few more dollars into your pocket each month because of lower monthly car payments. You could also maintain the same loan payment amount or increase it to help pay off your loan faster.
Car loan refinancing could help you save money over the original loan or simply free up some room in your budget to pay off other high-interest debts. During the application process, you’ll need to closely compare loan options from new lenders, keeping a particular eye out for better terms and more competitive rates over the life of the loan. These will keep your monthly payment down.
Auto Refinancing Options if You Have Bad Credit
If you are seriously considering refinancing your auto loan, you have a few options on how to go about it. First, there is your current lender, but you should always look around for better deals. There are many online options available, plus credit unions, which can have some of the best rates available if you are a member.
Your Existing Lender
Contact your current lender and ask about refinancing options. However, don’t just stop there. Shop around to see if you can get an even better refinancing deal before committing to one. Any new lender willing to offer you a refinancing deal will work with you to try and make the process as seamless as possible.
Best Auto Refinance Lending Options
Shopping around online to compare offers can help ensure you get the best rate and terms for your loan. Several online lenders offer auto refinancing to people with bad credit, including:
Auto Credit Express
Auto Credit Express first requires you to fill out their refinance request form where you enter your contact information, your housing expenses, and your monthly income. Once you fill out all the information, they’ll be in contact about loan terms. Auto Credit Express is ready to work with those even with a low credit score.
Capital One
Capital One will ask you what you want to prioritize when it comes to refinancing — saving money, paying off your loan quicker, or lowering your APR. After putting in your car loan information, they will show you what you could potentially save. If you agree to terms with Capital One, they’ll take care of your old auto loan and assist in the transfer process.
To qualify for refinancing with Capital One, your vehicle must be 10 years old or newer, your current loan must have between $7500 and $50,000 left to pay off, you must be up to date on payments, and the vehicle must still be in production.
LendingClub
LendingClub offers refinancing if your vehicle is 10 years old or newer, has under 120,000 miles, your current loan has $4000-$55,000 left on it, and you have at least 24 months of payments remaining.
MyAutoLoan.com
MyAutoLoan will present you with up to four refinancing options once you fill out your loan and vehicle information.
RoadLoans
RoadLoans has teamed up with Chrysler Capital to manage their auto refinance loans. Simply fill out the form and see what you qualify for.
OpenRoad Lending
After filling out the necessary personal and vehicle information, OpenRoad Lending should get back to you with what you qualify for in just a couple hours.
Local Credit Unions and Other Financial Institutions
If you are a member of a credit union you can benefit from superb refinance options. Credit unions usually offer better rates, less fees, and are more willing to work with borrowers who have lower credit scores. You can also always try your local bank and see what they offer.
Borrowers looking to refinance their auto loan should consider all of the above options to see which one offers them the best deal.
What You Need to Know About Auto Loan Refinancing
Before deciding to refinance your auto loan, make sure you consider all the factors that go into the process. Including:
Loan amounts: This is the amount left on your car loan and will play a factor in how much your monthly payment will be when you refinance. If you have too little or too much left to repay, you may not qualify for certain refinance options.
Rates: Your interest rate is the biggest factor in terms of how much you’ll end up paying on your loan. If you already have a relatively low interest rate, it might be best just to stick with it. Otherwise, do what you can to improve your credit score prior to refinancing to qualify for the lowest rate possible.
Repayment terms: If you feel like you’re paying too much per month, you can look for repayment options, which lower your payment amount. Be aware that lowering this will inevitably prolong the length of your loan, making you pay more overall.
Credit score requirements: In order to qualify for the best refinancing options, your credit score must meet a certain standard. Before you start shopping, get your annual credit reports to review your credit history and check your official scores for free. Fix any errors you see and work on improving your credit score before you select any refinancing options.
Car requirements: Depending on the car you’re looking to refinance, there may be some hiccups in the process. Many lenders require cars that are 10 years old or newer, are below a certain mileage number, or that the model is still in production.
Always keep in mind that when you apply for refinancing or a new loan, the lender will conduct a credit inquiry, which can take a few points off your credit score. If yours is already low, this is even more of an incentive to boost your score in the meantime.
If you’re looking to refinance your auto loan, don’t make these common mistakes:
What Happens if You Refinance Your Auto Loan With Bad Credit
For borrowers with a FICO score between 300-579, you’ll only be eligible for a subprime or even a deep subprime auto loan rate. Lenders don’t have strict cutoffs for considering someone a subprime borrower, but the term typically applies to those with credit scores ranging from 550-650. Any score below 550 puts you into the deep subprime category.
If you have bad credit, refinancing might not be worth it unless you can get a better interest rate or loan term than what you currently have. Otherwise, you may only be offered rates that are on par with your current loan or are even more unfavorable.
How Will My Credit Score Affect My APR?
According to Experian’s State of the Automotive Finance Market, the average loan rate on a used car for a borrower in the deep subprime category is 20.58% or 17.11% for a borrower who is considered subprime.
Borrowers in the prime category, considered good credit, receive annual percentage rates of 5.49% on average, while super-prime borrowers (the ones with the very best credit) see rates averaging 3.66%. Simply put, it pays to have a better credit score. Consider spending time building your credit score before attempting to refinance.
Is Refinancing Your Auto Loan Worth It?
If you qualify for a lower interest rate than your current loan, it makes sense to consider it. As long as you maintain the same payment amount or increase it, you’ll set yourself up to pay off your vehicle sooner. It also makes sense to consider refinancing while your loan is still relatively new and not about to be paid off. This way you can save as much as possible.
For example:
Say the balance on your existing car loan is $10,000, your current interest rate is 20%, your current monthly payment is $372, and you have 36 months left on your 60-month car loan.
If you’ve improved your credit a bit and now qualify for a subprime rate instead of a deep subprime rate, you could refinance your current car loan at 17.11% for 36 months, or $357 a month. While saving $15 a month in the form of a lower monthly payment doesn’t seem like much, it can add up. You’ll save $524 total.
Use a refinance calculator to check your numbers before you commit to a new loan provider.
More to Consider When Refinancing a Car Loan With Bad Credit
Your interest isn’t the only thing to consider when refinancing a car loan. For example, the terms of your loan could result in you paying a higher or lower monthly payment, which might not be possible for you depending on what you can afford. Other things to consider when refinancing are prepayment penalties, fees, and where you are in the life of your loan.
Prepayment Penalties
If your prepayment penalty is more than what you’d save by lowering your rate, refinancing might not make sense. Prepayment penalties are a fee charged to borrowers who pay off their loans ahead of schedule. These can be aggravating if you have the ability to pay off your loan but it actually costs more to do so. This clause is usually outlined in your loan documents.
Where Are You in The Life of Your Loan
The best time to refinance your auto loan is when you’re early into payments so you can cut a good chunk off the total debt. To refinance near the end of your payment term may not be worth the trouble if you’ll be finished with the loan soon.
Term of the New Loan
If possible, avoid lowering your monthly payments by extending your loan term. A longer term will end up costing you more in the long run. This increases the chance of becoming “upside-down” on your car loan, where you end up owing more on the car loan than the vehicle is worth.
This can be risky for two reasons:
- If you total the car in an accident, your insurance company will pay your car’s current value. If you’re upside down on your loan, the check you received from your insurance company won’t cover your current loan balance
- If you need a different vehicle, you’ll have a tough time selling or trading in your car.
Fees
The fees to refinance your auto loan should be minimal, but there may be fees to change the lienholder on the title or re-register the new loan with the DMV. You shouldn’t need to make a down payment, since you’ve already paid off part of your original loan.
Extra Products Like Extended Warranties
Some dealerships could try and sell you add-on products like extended warranties or extra insurance when you refinance your car. These extras are usually not needed and can tack on thousands of additional dollars to your loan, so avoid them unless you really think you need them.
How to Refinance A Car Loan With Bad Credit
Whichever refinance route you take, the process is relatively simple. Typically, all you need is:
- Proof of ownership
- Proof of income
- Information on your current loan, including your monthly payment, interest rate, loan term, account number, and lender’s name and address
- Information on your car, such as the age and mileage
- A credit check
You can do this on a number of online sites or with a bank or credit union in person. With that information, your chosen lender will offer you a refinanced rate on your loan.
The Bottom Line
There are many options available for borrowers who are looking to refinance their existing loan, even if they have bad credit. Consider consulting an array of different lenders to determine the best deal for you. If you don’t need to refinance right away, make sure you try to increase your credit score as much as possible beforehand. Even a slightly better interest rate or loan term could save you hundreds to thousands of dollars.
FAQs
Yes, especially if the co-signer has better credit than you do. Just be sure they know they will foot the bill on the loan if you are unable to pay it.
New cars have no prior ownership and almost no driving history associated with them. On top of that, new cars are usually designed better than older ones, with updated safety and accessibility features. All these factors make it less likely for a new car to have issues.
Used cars on the other hand could have an accident history or simple wear and tear if the vehicle has been driven for many years. A used car is much more likely to have problems and require routine maintenance.
Your credit score is meant to demonstrate your ability to pay a loan. Considering lenders want to get their money back, they trust giving money to more trustworthy borrowers who are more likely to pay their loan. While lenders will miss out on charging a higher interest rate than borrowers with lower credit scores, they are much more likely to get their money back. The higher your score, the easier it is to prequalify for a loan when you need to purchase a car.
FICO Score Ranges:
Super prime: 781-850
Prime: 661-780
Near prime: 601-660
Subprime: 501-600
Deep subprime: 300-500
The biggest way you can improve your credit score is to make on-time payments consistently. This will show you can handle a long-term loan. Paying off any outstanding debt, keeping your credit utilization under 30% and keeping your total accounts to a minimum are additional ways to boost your rating.