Refinancing a car with bad credit
Quick insights
- It is possible to refinance your auto loan while having a low credit score.
- Refinancing auto loans may come with pros, such as lower monthly payments, and cons, such as higher interest rates.
- Deciding to refinance your auto loan depends on your financial needs, credit, lender and other factors pertaining to your vehicle and credit score.
Thinking about refinancing your car loan? You may be able to do so even if you have a low credit score. Let’s explore how you can go about refinancing an auto loan if you have bad credit.
Can you refinance a car loan with bad credit?
Refinancing a car loan when you have “bad credit” (a Vantage(R) score under 600 and a FICO(R) score under 580 are classified as “poor” under both scoring models) is possible, but you may face higher interest rates and less favorable terms. One way to help improve your chances of being approved for refinancing is to add a co-signer with a good credit score to the loan. This is someone who becomes responsible for making payments should you be unable to do so.
If you're refinancing with the hope of lowering your interest costs, you may not get the terms you were hoping for. That being said, refinancing with a low credit score can come with its advantages.
Benefits of refinancing a car loan with poor credit
Below are some benefits of refinancing a car loan with a low credit score:
- Potential to lower your monthly payment and lengthen the loan term (although this could potentially result in you paying more interest over the life of the loan).
- Adjusting your interest rates; for example, if you initially had a high-interest loan and have since improved your score, you could qualify for a loan with lower interest rates. However, it may be hard to qualify for a better interest rate if you still have a poor credit score.
- Potential to shorten the loan term to pay off your car sooner; note, however, this could increase interest rates and increase the monthly payments.
- Potential to improve your credit score by improving your payment history with more manageable monthly installments.
Risks of refinancing with bad credit
It can be helpful to keep in mind the potential drawbacks of refinancing an auto loan before you make your decision. These include:
- Possibility of higher interest rates which could increase the overall cost of the loan.
- Potential for fees or penalties that may come with certain refinancing options.
- Increased overall cost in total interest if the loan term gets extended.
How soon can you refinance a car loan with bad credit?
There’s typically a waiting period before you can refinance your auto loan after you have been approved for the original loan. This time period may vary depending on your lender, so it can be helpful to review these terms and conditions and discuss your options with them.
Additionally, there are some factors that can affect your timeline. These include the length of your loan term, remaining balance and your credit score, which can affect your eligibility to refinance your car loan. If you plan to improve your credit score before refinancing, this could take additional time, patience and healthy, consistent financial habits.
Conclusion
Having a low credit score can sometimes feel like a barrier to making financial decisions such as refinancing a car loan. However, it is possible to refinance your car with a bad credit score; weighing the pros and cons to refinancing and understanding the implications of refinancing a loan can be helpful approach to making this decision.
