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Have you thought about refinancing to lower your payment or perhaps get a better interest rate if your car loan payments are straining your budget? However, it might not be feasible or cost you less money if your credit score is low. Instead, consider alternatives first. Auto Car I have bad credit. Can I refinance my car loan?
While it is possible to refinance a car loan with bad credit, doing so may put you in a precarious financial situation. As a result, it is advisable to look into other options first, such as asking for a loan modification or trading in your car.
Why you shouldn’t refinance a car loan with bad credit
When you refinance your auto loan, the lender begins a new loan term. In practice, you could get a more affordable monthly payment. But there’s a catch: You probably won’t get a better interest rate unless your credit score has increased since you took out the initial loan.
Even worse, since the lender will have more time to charge you interest, you might end up paying more over the course of the loan. This can work if you need to lower your monthly payment. Otherwise, extending the term of your loan without obtaining a lower interest rate may result in you paying substantially more than the value of your car.
Equally crucial is finding out whether your current lender imposes prepayment penalties. If so, refinancing your auto loan may have disadvantages that outweigh the advantages of a lower monthly payment.
How to refinance a car loan with bad credit
Refinancing may make sense if you already have a bad credit auto loan, interest rates have dropped since you bought your car, or you are in dire need of a lower payment. And the refinancing procedure entails extensive research, just like looking for a new or used car.
Before you begin looking for a new loan, review your credit report and score to prevent any surprises. File a dispute as soon as you become aware of any incorrect or out-of-date information with the credit bureaus reporting it, Experian, TransUnion, or Equifax.
You can request a copy of your credit report for free using AnnualCreditReport.com.
You can inquire with your current lender about possible refinancing options.
Consider banks or credit unions you currently do business with. Additionally, consumers with less-than-perfect credit may have access to online lenders like Caribou, RefiJet, and Ally Clearlane. You might be able to check your rate without it having an impact on your credit score depending on the lender. Lightbulb Bankrate Tip.
Pay close attention to the approval requirements and repayment options when shopping, especially given the age and mileage of your vehicle.
Apply for a new loan
Gather any documents required by the lender to hasten the review procedure prior to submitting a loan application. Most will demand documentation of your income, place of residence, and current loan information. Additionally, you’ll need to provide your car’s mileage, make, model, and VIN number.
Complete the forms completely when you apply to prevent errors that could cause your application to be rejected. The lender will confirm the information you provide.
Examine the loan documents to make sure the conditions are favorable to you. If so, confirm your agreement by signing on the line. Either you or your current lender will receive the funds directly so you can repay the initial loan. Lightbulb Bankrate Tip.
Find out when you can start making payments by contacting your lender. From this point on, until your refinanced loan is paid off, you will adhere to the new monthly payment schedule.
How to boost your credit before refinancing
Before refinancing your auto loan, it is in your best interest to raise your credit score. Good or excellent credit borrowers typically receive the most affordable interest rates, and a higher credit score could mean the difference between receiving a 5 percent or a 19 percent interest rate.
Here are some practical ways to improve your credit score:
To follow your progress, you should also keep an eye on your credit score. Some lenders or credit cards will provide you with a free credit report along with your monthly statement. If not, you might have to make do with infrequent checks or paying to see your score.
Alternatives to car loan refinancing
If you do the math and determine that refinancing your car loan isn’t a wise financial decision, there are other options available.
Refinancing with bad credit may not be a wise financial move unless you are facing severe financial difficulties and risk having your car repossessed if you can’t lower the payments.
Instead, look into alternatives, such as temporarily adjusting your spending plan until you get your money and credit situation under control. Alternatively, depending on how much your car is worth, you might be able to exchange it for a more affordable vehicle.
FAQ
Can I refinance my car with a 500 credit score?
You can refinance a car loan with a 500 credit score if you have good credit. However, because you fall into the poor credit category with a credit score of 500, you’ll probably have to pay high interest rates.
Can I refinance my car with 600 credit score?
To refinance your auto loan, a minimum credit score is not necessary. However, if your credit score is 661 or higher, it can greatly increase your chances of being approved and lower your interest rate.
How long before you can refinance a car with bad credit?
You should hold off on refinancing for at least a year if this is your first time borrowing money for a car or if you’ve previously experienced credit problems. This way, you’ll have enough time to establish a solid track record of timely payments. Some lenders won’t consider a refinancing application until you’ve made on-time payments for six to 12 months.
Can I refinance my car loan with a 580 credit score?
There’s no universal minimum credit score to determine your eligibility. Car owners with credit scores below 580, which is considered poor credit, may be eligible for a refinancing offer. This is due to the possibility that lenders’ standards for approving your new loan may vary.