Can I refinance a car loan with bad credit?



Are your car loan payments stretching your budget thin? You may have considered refinancing to lower your payment or possibly get a better interest rate. But if your credit score is low, it may not be possible or save you money. Instead, consider alternatives first. Why you shouldn’t refinance a car loan with bad credit



Lenders start a new loan term when you refinance your auto loan. In practice, you could get a more affordable monthly payment. But there’s a catch: Unless your credit score has improved since you took out the original loan, you likely won’t get a better interest rate.





Even worse, you could pay more over the life of the loan since the lender will have more time to collect interest from you. If you need to lower your monthly payment, this can work. Otherwise, stretching out your loan term without scoring a lower interest rate may mean paying far more than your car is worth.





It’s equally important to determine if your current lender charges prepayment penalties. If so, the drawbacks of refinancing your auto loan could outweigh the benefits of a lower monthly payment.


How to refinance a car loan with bad credit




If you already have a car loan with bad credit and interest rates have decreased since you purchased your vehicle, or you absolutely need a lower payment, refinancing could be worthwhile. And just like shopping for a new or used car, the refinancing process involves a lot of research.

Check your credit



Review your credit report and score to avoid any surprises before you start shopping for a new loan. If you notice any inaccurate or outdated information, file disputes promptly with the credit bureaus — Experian, TransUnion or Equifax — reporting the incorrect data.





Explore your options: You can check with your existing lender about refinancing options that may be available to you.





Consider banks or credit unions you currently do business with. And online lenders — like Caribou, RefiJet and Ally Clearlane — that cater to consumers with less than perfect credit may also be an option. Depending on the lender, you may be able to check your rate without affecting your credit score.





Apply for a new loan: Before submitting a loan application, gather any documents the lender will need to expedite the review process. Most will request proof of income, residency and information about your current loan. You will also need to provide the mileage, make, model and vehicle identification number for your car.





When you apply, accurately complete the forms to avoid discrepancies that can result in a denial of your application. The lender will confirm the information you provide.



Finalize the loan: Review the loan documents to ensure the terms and conditions work for you. If so, sign on the dotted line to finalize the transaction. The funds will either be sent directly to your current lender or to you so that you can pay the original loan off.

How to boost your credit before refinancing



It is in your best interest to improve your credit score before refinancing your car loan. The most competitive interest rates are generally reserved for borrowers with good or excellent credit, and a higher credit score could mean the difference between getting a 5 percent or 19 percent interest rate.





You should also monitor your credit score to track your progress. Some credit cards or lenders will offer you free credit checks with your monthly statement. Otherwise, you may need to rely on checking them infrequently or paying to see your score.





Alternatives to car loan refinancing: There are other options available if you run the numbers and decide that refinancing your car loan isn’t a smart financial move.
Trade it in. Depending on what your car is worth and how much is owed on the current loan, you could trade it in for a more affordable option and possibly roll the outstanding balance into a new loan.
Defer payments. This is only available if you’re facing short-term financial hardship, but it is an option. You may be able to skip up to three months of payments. However, they’ll be tacked on to the end of your loan and you will still be accruing interest.
Adjust your budget. If you are upside down on your current loan, consider adjusting your budget to make the payments more affordable until you qualify for a refinance. You should also improve your credit score in the meantime to get a better interest rate when you apply for a new loan.
The bottom line
Unless you are experiencing financial hardship and risk having your car repossessed if you can’t lower the payments, refinancing with bad credit may not be a healthy financial decision.
Instead, explore alternatives, like adjusting your spending plan temporarily until you get your finances and credit health back on track. Or you may be able to trade your car in for a more affordable ride, depending on how much it’s worth.

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