Can You Refinance a Car Loan with Bad Credit?

Many lenders will refinance a car loan no matter your credit rating, but you should consider certain factors before you make your decision.

Have you ever wondered whether you can refinance a car loan with bad credit? The answer is yes, you absolutely can. Under the right circumstances, refinancing can help you negotiate better terms and save money.

Auto loan refinancing isn’t for everyone, though. Unless you meet certain conditions, you might not get the interest rate you want. So, before you try to get a new car loan, consider certain factors so you can make an informed decision.

Read on to discover the requirements for refinancing a car loan, the steps of the refinancing process, the benefits of negotiating a new car loan, and more.

What Are the Requirements for Refinancing a Car Loan with Bad Credit?

One question car owners often ask is, “What credit score do I need to refinance a car loan?” The answer isn’t always straightforward.

There’s no universal minimum credit score to determine your eligibility. Car owners could potentially get a refinancing offer even with credit scores below 580, which qualifies as poor credit. This is because lenders might have different requirements for approving your new loan.

They also consider many other factors to calculate the risk involved when negotiating a new loan, such as:

  • Income: The amount of money you earn tells the auto refinance lender whether you have enough money to pay back the money you owe. Just like when you took out the original auto loan, the higher your income, the higher your chances of getting approved for auto loan refinancing.
  • Debt-to-Income Ratio: Your debt-to-income ratio (DTI) is a percentage based on the sum of your monthly debt payments divided by your monthly income. In this scenario, “debt” means anything you pay off monthly, including rent or mortgage. So if you owe $1,000 in loan payments plus a $1,000 monthly mortgage, your debt is $2,000 per month. If you earn $5,000 in income in the same period, your DTI would be 40 percent. In most instances, a DTI that low would help your case for refinancing.
  • Loan-to-Value Ratio: The loan-to-value ratio (LTV) is a percentage that measures the cash value of your vehicle relative to the dollar value of your loan. A lower LTV is preferable because it means you owe less on your loan balance than the vehicle is worth. In contrast, a higher LTV could make it harder to get approved for auto loan refinancing.

With all that being said, you want to get your credit score as high as possible before you pursue auto loan refinancing. People with higher credit scores improve their chances of getting lower interest rates. You can also avoid having to get a co-signer for your refinanced auto loan.

How to Refinance a Car Loan with Bad Credit in 5 Steps

If you’ve decided refinancing your car loan is the way to go, follow these steps to make sure you get the best deal possible:

1. Check Your Credit Score

First, visit AnnualCreditReport to see where you stand in terms of your credit. Through this website, you can access your reports from all three major credit bureaus Equifax, TransUnion, and Experian without affecting your credit score. Weekly reports are available for free until the end of 2022.

One thing you want to check is whether your score has improved since you took out the auto loan you want to refinance. If it has, then you can feel more confident in your eligibility for refinancing with better terms.

Another thing to look for is any piece of inaccurate or outdated data. Specifically, try to identify missed payment claims or activity relating to accounts that aren’t yours. If you find anything amiss, contact the credit bureaus to file disputes. Each one has an online portal for submitting and resolving issues.

2. Compile Your Information

Next, compile all the documentation you might require to apply for auto loan refinancing. You’ll need these documents to prove to the lender your identity, your credit score, and the value of your vehicle:

  • Identifying Information: Include formal documentation to verify your name, address, phone number, income, employment, and Social Security number. Your driver’s license, ID card, bank statements, employment contract, Social Security card, and birth certificate are examples of documents you can use.
  • Loan Information: Documentation concerning your existing loan is essential for refinancing. The documents you include should state the identity of your lender, the number of your loan account, and the vehicle’s payoff amount.
  • Car-Related Information: Finally, you’ll need documents verifying information related to your vehicle, such as the registration number, the vehicle identification number, and the car’s make, model, and year.

3. Consider Your Options

Now you can shop around for the best refinancer. Your current lender is a good place to start. If they offer refinancing options for auto loans, working with them can make for a smoother process. After all, they already know who you are and have your information in their database. In some cases, working with your current lender can lead to the best rates.

Even if your lender offers a good deal, look around for other options before making your final decision. Consider a reputable bank or credit union in your area, and shop around for rates from online lenders as well.

4. Apply to Get Rates

Auto refinance lenders often display promotional rates to attract prospective borrowers. To understand exactly what to expect from each lender, apply to each one that appeals to you. You won’t be accepting every lender’s offer. You just need to know what rates they intend to give you.

The major bureaus promote this sort of comparison shopping by allowing consumers to submit multiple applications within a 14-day period. If you remain within this period, your credit score doesn’t take a hit.

5. Choose the Best Lender

After comparing the offers from your prospective lenders, choose the one with the best terms for your needs. Because you’ve already submitted an application, all you have to do is sign with your preferred lender. As for the others, just let their offers run out.

Your new lender will have received your documentation and should handle much of the legwork from here on out. They usually pay off your existing loan, though some lenders give you the money to transfer to your previous lender instead.

Why Refinance a Car Loan with Bad Credit?

Vehicle owners might decide to refinance their car loans for a variety of reasons:

Lower Monthly Payments

The most common reason for refinancing a car loan is to lower your monthly payment amount. Refinancing is the act of replacing your existing loan with a new one. If you can extend the loan period through refinancing, you can end up paying less in principal every month. Also, if you qualify for a lower interest rate, you’ll pay less in the long term.

In either case, you’ll have an easier time keeping up with your car monthly payments. However, if you extend your loan period, you might end up paying more in interest overall.

Better Credit Score

Lower monthly payments can lead to a second driving force for refinancing: improving your credit rating. Here’s how that works:

  1. When you aren’t struggling to pay off your monthly debts, you’re less likely to miss payments.
  2. As you continue to satisfy your loan requirements, you prove you’re a reliable borrower.
  3. As a result, your credit rating is likely to rise. In fact, if you’ve been paying off your car loan without fail, your credit score has probably gone up already.


Ideally, lower monthly payments from refinancing allow borrowers to put away extra money. These ongoing opportunities to squirrel away cash can lead to positive outcomes. Over time, you can use the savings that accumulate to pay off other expenses, including emergencies.


A temporary advantage of refinancing is the potential reprieve from car loan payments. Refinancing a loan is a process that takes time. It’s not uncommon for several months to pass between starting an application and your new loan taking effect.

During that time, you have some relief from your debt obligation. Take advantage of the reprieve by saving up your earnings so you’re in better financial shape when your payments start up again.

Future Loan Eligibility

While you build your credit score, you also set yourself up for future financial advantages. You’ll find you have an easier time getting approved for loans with preferable interest rates. Those loans help establish a positive cycle of credit-building.

Cashing Out

Sometimes unexpected events in your life result in expenses for which you’re unprepared. When that happens, you need money fast. Some lenders give borrowers the option of cashing out against their vehicle’s equity. However, this is usually only advisable if you initially paid a large down payment.

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