If you have a high-interest car loan, you may be interested in learning whether refinancing is possible with a low credit score. The answer is that refinancing may still be possible, although approval and the terms you receive depend on the lender and your overall financial situation.
Refinancing an auto loan means replacing your existing loan with a new loan, usually from another lender. The new lender uses the new loan to pay off your current auto loan, and you then make payments under the new agreement. Depending on the offer, refinancing may change your interest rate, monthly payment, loan term, or total borrowing cost.
What to Know About Refinancing a Car Loan With Poor Credit
Yes, some lenders consider applications from borrowers with poor or limited credit. However, having bad credit can make it more difficult to qualify for a lower interest rate.
Lenders generally review several factors when evaluating an auto refinancing application. These can include your credit history, income, existing debts, loan balance, loan term, and the value and condition of your vehicle.
Because lenders use different requirements, one lender may decline an application while another may offer financing with different terms. This is one reason comparing multiple offers can be useful.
Why Consider Refinancing an Auto Loan?
One common reason to refinance is to reduce the interest rate. If your credit or financial situation has improved since you originally financed the vehicle, you may qualify for different loan terms.
Refinancing could also potentially reduce your monthly payment. Keep in mind that reducing your monthly payment does not necessarily reduce the total amount you will pay over the life of the loan. For example, extending the repayment period can reduce the amount due each month while increasing the total interest paid over the life of the loan. The Consumer Financial Protection Bureau also warns that longer terms can make monthly payments more affordable while increasing total interest costs.
Factors That May Affect Your Refinancing Application
Before applying, consider the information a lender may review.
Credit history
Your credit score and payment history can influence the interest rate and terms you are offered.
Income
Lenders may review your income to determine whether you can reasonably make the new payments.
Debt obligations
Existing debts can affect how a lender evaluates your ability to repay the loan.
Vehicle value
The amount you owe compared with the vehicle's value can also matter. This relationship is commonly referred to as the loan-to-value ratio, or LTV.
Current loan terms
Review your existing interest rate, remaining balance, monthly payment, and remaining loan term before comparing refinancing offers.
How to Improve Your Chances of Refinancing
If your credit is not strong, taking a few steps before applying may help you prepare.
First, review your credit reports and check for inaccurate information. If you find errors, you can dispute them with the appropriate credit reporting company.
Next, review your current auto loan. Know your remaining balance, interest rate, monthly payment, and payoff amount.
You can then research different banks, credit unions, and other lenders that offer auto refinancing. Comparing offers can help you understand the range of rates and terms available to you. CFPB guidance recommends comparing lenders rather than relying on a single financing option.
If possible, keep your loan shopping within a relatively short period. Depending on the scoring model and circumstances, multiple auto-loan inquiries made within a 14-to-45-day period may generally be treated as a single inquiry for credit-scoring purposes.
Check for Fees Before Refinancing
Before accepting a refinancing offer, look beyond the monthly payment.
Check the new interest rate, APR, loan term, total repayment amount, and any application or other fees. You should also review your existing loan agreement to determine whether a prepayment penalty applies. CFPB guidance notes that some auto loans may have prepayment penalties, depending on the contract and applicable state law.
Reviewing these expenses can make it easier to evaluate the new loan against your existing financing.
Final Thoughts
Borrowers with bad credit may still have opportunities to explore auto loan refinancing, depending on the lender’s requirements. In many cases, you may be able to apply for refinancing even with a low credit score, but approval and loan terms vary by lender.
Before refinancing, review your credit, current loan balance, vehicle value, and existing loan terms. Compare multiple offers and look at the total cost rather than focusing only on the monthly payment.
A refinanced auto loan can provide different payment terms, but borrowers should compare the interest, fees, loan duration, and total repayment amount before making a decision. Taking time to understand the terms can help you make a more informed borrowing decision.