Can You Refinance Your Auto Loan With Bad Credit?

Here's how you can decide whether now is the right time for you to apply to refinance your car.

Elliot Rieth | 

Sep 20, 2023 | 4 min read

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If you're looking for ways to reduce your monthly bills, auto loan refinancing could help you obtain a lower interest rate or adjust your loan terms to decrease your regular payments. But what if you have bad credit?

Even if your credit score falls short of perfection, obtaining the financial help you need should still remain within reach. However, your eligibility for refinancing, as well as the potential benefits and risks associated with applying, hinges on not only your credit score, but also your current loan terms and external economic conditions.

Do I Qualify for Auto Loan Refinancing?

Whether you can refinance your current auto loan may depend on your credit score, as well as the lender you choose for your auto refinancing. There's no single credit score that every lender uses as a cut-off for approval or denial. However, as a baseline, any score under 580 is considered poor by FICO (Fair Isaac Corporation), one of many companies that calculate credit scores. Lenders commonly reference applicants' FICO scores because they're created using data from all three major credit bureaus.

Because there is no set credit score lenders are required to use for approvals, your choice of lender could determine your chances of success. Choosing a lender with more lenient or wide-ranging approval criteria may offer you the chance to refinance, even with less-than-stellar credit.

Beyond your chosen lender and your credit score, your chances of auto loan refinancing may also be determined by these factors:

• Loan-to-value ratio
• Debt-to-income ratio
• The age of your current loan

This means that even if your credit score isn't at its best, there are other considerations that could help boost your odds of approval.

When to Consider Refinancing Your Auto Loan

Once you have an idea of how your current credit score could impact your auto loan refinancing odds, you may be wondering if now is the right time to apply. While every situation is unique, here are a few indicators that refinancing might be the right move:

• If your credit has improved due to on-time payments on your original loan, you could have improved your score enough to qualify for a better interest rate — even if you still have bad credit.
• If rates have gone below what your current rate is, you could be able to save on interest by refinancing. Checking the Fed's current and historical rates can help you get a better idea of what your potential rate may be when you refinance, as well. However, keep in mind that these are for new rates, not refinancing rates.
• If you find yourself in a position where it's getting harder to pay your monthly auto loan, then refinancing may be a way for you to lower your monthly payment. Whether you get a lower interest rate or a longer loan term, your monthly payments could be reduced through refinancing. Keep in mind, however, that extending your loan term could result in paying more interest over time.

You may also find yourself in the position to leverage the value of your vehicle to your advantage. Getting quotes from online tools may help you determine your vehicle's loan-to-value ratio and discover whether you could qualify for a better refinance rate.

The Risks of Refinancing Bad Credit Auto Loans

If you decide the time seems right for you to apply for auto loan refinancing, it's still important to consider the risks that may come with refinancing before you submit your application.

When you apply for auto loan refinancing, your lender may require a hard credit check, which is a request to see your credit report that usually impacts your score. If you're already worried about your credit score's current standings, this could not only hurt your score, but your application could also potentially still end up getting denied. To reduce or eliminate the impact that shopping around for refinancing rates could have on your credit score, secure your loan within 30 days.

Also remember that if you choose to refinance your auto loan to extend the loan term for lower monthly payments, you may end up paying higher overall costs due to interest spread out over a longer period.

Refinancing and extending your loan may also cause you to become upside down, meaning you owe more than your car is worth, as your vehicle's value depreciates over time.

Even if you're in a position to avoid many of these risks, there's still the potential for prepayment penalties, as some lenders require you to pay a fee for ending your loan early. Your requirement to pay these penalties will likely depend on your state, loan contract, and lender — so be sure to check your terms before refinancing.

Elliot Rieth

Elliot Rieth is a writer who was born and raised in Michigan, the center of the American automotive industry. With a background in the industry that spans from sales to digital marketing, Elliot has years of experience working directly with dealers and OEMs to create digital content and educate potential customers. When Elliot isn’t writing about horsepower or EVs, he can be found with his two greyhounds enjoying a new book or record.