Learn How to Refinance Your Auto Loan with Bad Credit

If you're thinking about refinancing your car loan, having a low credit score can make the process more difficult. You might not be able to qualify for a lower interest rate or reduce your monthly loan payments if lenders think you're not a responsible borrower.

However, that doesn't mean it's impossible to refinance an auto loan with a poor credit score. Here are a few tips that will help you learn how to refinance a car loan with bad credit.

Considering a refinance on your car? Compare rates from lenders below:

How to Refinance a Car Loan with Bad Credit

You can still refinance an auto loan with bad credit, but getting a good rate can be difficult. Borrowers with low credit scores generally pay much higher interest rates. If you have poor credit, you can use these strategies to refinance your auto loan.

Review Your Budget

Start by doing a thorough review of your budget. Figure out how much you can afford to spend each month on your car payment. Then, use an online auto refinance calculator to estimate your new monthly payment based on the loan amount, current interest rate, current loan length, and loan balance.

Remember to factor in other expenses, like gas, car insurance, and maintenance. These costs can add up quickly and could exceed your total monthly car budget. Once you determine how much you can afford to pay for your new car loan, you can move on to the next steps.

Check Your Credit Score

Before you apply for a new loan, it's a good idea to review your credit report. In addition to your score, you also want to look for incorrect information, like an account you didn't open. Dispute any errors you find, as they can damage your rating and prevent you from qualifying for a new loan.

Check all three reporting agencies for a complete overview of your credit score. Most lenders that write car loans use Experian and Equifax, but you should also check your TransUnion file. There could also be an error in one agency's report that's not reflected in another, so be sure that all statements have accurate information.

There's no minimum credit score that will guarantee approval when refinancing your auto loan. Some lenders have more strict requirements than others, and some specialize in working with people who are rebuilding their credit histories.

However, if your goal is to get a lower interest rate, it helps to have a higher credit score when you refinance than when you took out your original car loan. You can request a free copy of your credit report once a year.

Knowing what's on your credit report will also help you set your expectations before shopping for a loan. For example, if there's a repossession on your credit report, consider looking for lenders that offer refinance loans for applicants like you.

If your credit score hasn't improved — or it has gone down — since you took out your original car loan, you may want to reconsider refinancing right now.

Contact Your Original Lender

Before looking for a new lender, contact your current one, especially if your loan is in good standing. Your bank may be willing to refinance your auto loan, especially if your credit score has improved.

However, not every financial institution will. And if rates have gone down, your original lender probably won't want to lose the extra money you're paying in interest.

Shop Around for the Best Offer

If you want to get a lower interest rate, consider shopping around for a new lender. Even if your original bank or credit union is willing to refinance your loan, getting multiple loan offers can help you get the best loan for your budget.

Don't just look at the monthly payment, either. You should also compare the interest rate, loan term, origination, and other fees.

Take time to explore your options because even a 1–2% drop in your interest rate could save you a significant amount of money. For example, if you're looking to refinance your $36,000 loan over a four-year term, you'll pay $5,379 in interest at 7% and just $3,795 at 5%. The overall savings amount in this scenario is $1,584 or nearly $400 a year.

To minimize the impact on your credit score, ask each lender to do a soft pull of your credit score. Even if they run a hard credit check, most scoring models count multiple credit checks of the same type as a single inquiry, as long as they're within a 14- to 45-day period. Inquiries related to refinancing shouldn't hurt your credit score, as long as you're within that timeframe.

Collect Your Documentation

Once you've picked the best loan refinancing offer, your lender will require several documents to finish the paperwork. While you're waiting for your pre-qualification, here is the information you will need to have ready:

• Identification or driver's license.

• Proof of income, like a pay stub.

• Vehicle identification number (VIN).

• Vehicle registration.

• Proof of insurance.

• Social Security number.

• Payoff statement from your current lender.

What's Considered a Bad Credit Score?

A credit score of 579 or less is typically considered to be "poor." Most banks consider a score of 580 to 669 to be "fair," while anything above 670 is good, very good, or even excellent. Because each lender uses its own guidelines to determine your creditworthiness, a low score may meet one company's requirements but not another.

Why Should You Refinance a Car Loan?

Even if you have bad credit, refinancing an auto loan can be beneficial. Here are a few reasons to consider refinancing your loan: