Can I refinance a car loan when I have bad credit? Part Of Refinancing a Car Loan In this series Refinancing a Car Loan Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our goal is to help you make better financial decisions by providing you with interactive financial calculators and tools as well as publishing original and impartial content, by enabling you to conduct research and compare data for no cost – so that you can make informed financial decisions. Bankrate has partnerships with issuers, including but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn money The products that appear on this site are from companies that compensate us. This compensation could affect how and when products appear on the site, such as, for example, the sequence in which they appear within the listing categories, except where prohibited by law for our mortgage home equity, mortgage and other home lending products. However, this compensation will not influence the content we publish or the reviews that appear on this website. We do not include the vast array of companies or financial deals that could be open to you. PeopleImages/Getty Images
4 min read Read Published 13 January 2023
Written by Allison Martin Allison Martin Written by Allison Martin’s work began over 10 years ago as a digital content strategist. She’s been featured in a variety of top financial outlets, including The Wall Street Journal, MSN Money, MoneyTalksNews , Investopedia, Experian and Credit.com. Editor: Rhys Subitch Editor: Auto loans Editor Rhys has been writing and editing for Bankrate from late 2021. They are committed to helping readers gain confidence to control their finances through providing clear, well-researched information that breaks down complicated subjects into bite-sized pieces. The Bankrate promise
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If you do refinance a car loan when you have bad credit it can put you in a financial precarious spot so it is wise to consider other options first, such as requesting loan modification or trading in your car.
Why you shouldn’t refinance an auto loan using bad credit Lenders start a new loan period when you . In the real world, you might obtain a less expensive monthly payment. However, there’s one caveat: Unless the credit scores have improved after taking the initial loan, you likely won’t receive a lower interest rate. And, even more importantly, you might have to pay more for the duration of the loan because the lender will have more time to get the interest. If you need to lower your monthly payment, this can work. If not, extending your loan time frame without securing the lowest interest rate could mean paying far more than your car is worth. It’s also important to know whether your current lender charges prepayment penalties. If it does, the disadvantages of refinancing your car loan might outweigh the benefits of a lower monthly payment. How to refinance the car loan for those with bad credit If you already have a credit score that has decreased since you purchased your vehicle or you are in need of to lower your monthly payments, refinancing could be worthwhile. And just like shopping for a new or used car, the refinancing process involves a lot of investigation. Make sure you review your credit score and report to stay clear of any surprises before you start searching for a new loan. If you notice any inaccurate or outdated information, you should file a dispute promptly to the bureaus that handle credit — Experian, TransUnion or Equifax reporting the wrong information. You can request a copy of your credit report at no cost by contacting . Explore your options inquire with your current lender on refinancing options that may be open to you. Look into credit unions and banks that you have a relationship with. And — like Caribou, RefiJet and Ally which cater to those with less-than-perfect credit may be a good option. Depending on the lender you choose, you might be able to check the rate of your loan without impacting the score of your credit. Bankrate Tip
When shopping , pay attention to repayment options and approval requirements specifically for your vehicle’s age and mileage.
Apply for a new loan Before you submit an loan application, gather any documents the lender requires to expedite the review process. Most will request documents proving your income, residency , and other information regarding the current loan. Additionally, you will need to supply the amount of miles in addition to the make, model, and vehicle identification number for your car. If you are applying, be sure to ensure that you fill out the form correctly to avoid any ambiguities that could result in a denial or rejection of the application. The lender will confirm the information you have provided. Finalize the loan Examine your loan documents to ensure the conditions and terms are acceptable to you. If yes, you must sign the dotted line in order to close the transaction. The funds will either be sent direct to your existing lender as well as to your current lender so that you can pay off the original loan off. Bankrate Tip
Contact your lender to see when you can begin making payments. From here, you’ll follow the new monthly payment schedule until the time you are able to pay off your refinance loan.
How can you improve your credit score before refinancing It is in your best interest to improve your credit score prior to refinancing your car loan. The best interest rates are usually offered to borrowers with excellent or outstanding credit scores, and a higher credit score could make the difference between getting the loan or not . Here are some ways to pay all your bills promptly. Make sure you are current on all past due loans. Reduce the amount of your credit card balance by 30 percent to less than 30% than the credit limit. Don’t close old credit accounts. Only apply for credit when you need to. It is also important to be aware of your credit score in order to track your growth. Some credit cards or lenders offer free credit checks on your monthly statements. In other cases, you might have to rely on checking frequently or making payments to check your score. Alternatives to refinancing your car loan refinancing There are other options available when you look at the numbers and decide refinancing your car loan isn’t the best financial move. Sell it. Depending on what the car is worth and what is due on the current loan it is possible to trade it in for a more affordable option , and even roll the outstanding balance into a new loan. Request modification. Since the majority of lenders don’t change their loans, you would ask for this in the form of . This allows you to adjust the payment terms and, sometimes, interest rateswithout having to go through a new application process. It is possible to defer payments. This is only available if you’re in a financial crisis that is short-term, but it is an alternative. You may be able to cut off up to 3 months of payment. However, they’ll be tacked onto the last month of your loan and you’ll incur interest. Adjust your budget. If you’re struggling , consider adjusting your budget to make the payments easier to afford until you qualify to refinance. You should also improve your credit score the meantime to get a better interest rate when you apply for the next loan. The main thing to remember is that unless you’re experiencing financial hardship and are at risk of having to pay a penalty if you can’t lower the payments, refinancing on bad credit may not be the best financial option. Instead, explore alternatives, like adjusting your spending plan for a short period until you can have your finances and credit health back to normal. You may also be able to exchange your vehicle for a less expensive vehicle, depending on how much it’s worth.
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Allison Martin’s writing started over 10 years ago when she was an expert in digital content, and she’s since been featured in several leading financial outlets, including The Wall Street Journal, MSN Money, MoneyTalksNews , Investopedia, Experian and Credit.com. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are dedicated to helping readers gain the confidence to manage their finances with precise, well-researched and well-researched facts that break down otherwise complex subjects into bite-sized pieces.
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