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Guides

3 Steps — Refinance Car Loan with Bad Credit (How, Where, When)

Linsey Knerl 5/11/18

If you’ve found your existing car loan to be a bit of a burden, you may have considered refinancing. This option is popular among car owners who still have a substantial amount of debt left on their bank note and intend on driving their vehicle for at least a few more years.

While refinancing is usually not that complicated, getting approved for an interest rate reduction can be more difficult if you’ve experienced late payments, a bankruptcy, or overextended credit accounts. Here’s what you need to know about refinancing if you have bad credit.

How to Refinance | Where to Refinance | When to Refinance

1. How to Refinance: Lower Your Interest Rates & Payments

If you’ve decided that you want to go ahead and try for a refinance, there are a few important steps you should take. First, you should make sure that your current lender isn’t open to refinancing. If it’s been a few years since your loan originated, you may be eligible for a new loan.

If your originating loan was designed specifically for a bad credit situation, and you’ve made payments on time since the start, your lending institution may have a path for refinancing open to you. Ask if they do, and let them know that you are shopping around for better terms. This conversation alone may be enough to get you a more favorable rate or payment terms.

If they aren’t open to refinancing, it’s time to shop around for other lenders. You’ll want to make sure you have all the needed paperwork and documentation together before you start looking. Not having proper documention is one of the top reasons auto lenders deny applications. While each lender will have a slightly different application process, most require the following:

Information about You

  • Your Social Security number, current address, and previous address (if you haven’t lived in your current residence at least 2 years)
  • Employment information, including your current and previous workplaces, their addresses and some contact information
  • Wage and earnings info in the form of pay stubs or W2s. (Self-employed individuals may use their previous year’s tax return)
  • Your current lending institution for your existing car loan, as well as the account number for that loan
  • Current loan payment amount and balance (this may be different than an immediate “payoff” amount)

Information about Your Vehicle

  • Vehicle make, model, and year
  • Vehicle mileage
  • VIN (Vehicle Identification Number)

Note that many lenders have very specific requirements of a car loan that may disqualify you from applying. Some lenders, for example, may not offer refinancing on cars older than 5 years or with a mileage of over 100,000 or even 75,000.

If it’s been awhile since you checked your credit history and score, now is a good time to do that. Even with less than stellar credit, you might find valuable information on your report that can help you with the application process. Any mistakes can be caught now and corrected before you apply for the new loan.

2. Where to Refinance: Shop for the Right Lender

Some banks specifically market their auto-refi business to those with bad credit, and they could have a loan option that’s a good fit for your budget. Among those, you want to see which can offer you the best rate.

Annual interest rate is important, but you also need to ensure that monthly payment amounts are both on target with your budget and appropriate to paying off the loan in a reasonable time. You don’t want to be making payments long after your vehicle has depreciated past its loan value or useful life.

The loan process is also an important trait to look for in a lender. Is their application user-friendly? Can they accommodate online financing? Will they have the kind of customer service you need to feel taken care of? Many of the following lenders have been given high marks for both rates and payment terms, as well as ease of application.

4.9 /5.0 Stars
  • Network of dealer partners has closed $1 billion in bad credit auto loans
  • Specializes in bad credit, no credit, bankruptcy, and repossession
  • In business since 1999
  • Easy, 30-second pre-qualification form
  • Bad credit applicants must have $1500/month income to qualify
  • See official site, terms, and details »
Interest Rate 3.99% - 29.99%
In Business Since 1999
Application Length 3 minutes
Reputation Score 9.5/10
Our Expert Review 4.9/5.0 (see review)
4.5 /5.0 Stars
  • Free, no-obligation application
  • Specializes in auto loans for bankruptcy, bad credit, first-time buyer, and subprime
  • Affordable payments and no application fees
  • Same-day approval available
  • Connects 1000's of car buyers a day with auto financing
  • See official site, terms, and details »
Interest Rate Varies
In Business Since 1994
Application Length 3 minutes
Reputation Score 9.0/10
Our Expert Review 4.5/5.0 (see review)
4.0 /5.0 Stars
  • Loans for new, used, and refinancing
  • Queries a national network of lenders
  • Bad credit OK
  • Get up to 4 offers in minutes
  • Receive online loan certificate or check within 24 hours
  • See official site, terms, and details »
Interest Rate Varies
In Business Since 2003
Application Length 2 minutes
Reputation Score 7.5/10
Our Expert Review 4.0/5.0 (see review)

Research is vital at this stage, so don’t hesitate to look at all available resources in comparing financial institutions. Remember that you ideally only want to apply with one bank, since any credit inquiries they run to qualify you will cause your credit score to take a small hit. Getting the right lender from the beginning can spare your credit any unnecessary damage.

3. When to Refinance: If You’re Behind on Payments or Qualify for a Better Rate

Many people don’t consider refinancing an auto loan until it’s become a burden to them. While you will want to pursue a different lender if you find yourself behind on payments, the best option is to be aware of what’s available and apply for a more favorable rate before it affects your ability to pay.

Those with bad credit need to be especially diligent about being proactive with loan payments. Do some research every few months, and see what someone with your credit score might be eligible for. The results may be surprising!

Improve Your Credit to Increase Odds of Approval

If you’re not in a dire situation and can keep making payments on your current auto loan, you may consider rebuilding your credit history to improve your score prior to applying. But if you’ve already applied and end up being denied for refinancing, the steps to take are the same. Do not immediately try to get another loan through a different lender. Instead, see about increasing your score first.

Improve your credit score to increase your odds of approval. Photo credits: Kinecta.org

In addition to pulling your free annual credit report and looking for any errors in reporting that may be affecting your score, you can continue making payments on your existing accounts in a timely manner. Avoid making any big financial changes, such as opening or closing new credit lines. Most importantly, keep an eye on your score (on a monthly basis, if possible) to track positive changes as they happen.

Finally, you may want to consider a credit repair service in cases of an especially low credit score. Even a few points can make the difference in being approved for that new lower rate on an auto loan.

About Linsey Knerl
Linsey is a freelance blogger, author and public speaker with a passion for helping everyday families earn more and live better. She shares her expertise for parents who want to start budget-friendly businesses from home at 1099Mom.com.
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