Can You Refinance a Car Loan With Bad Credit?

It's possible to refinance a car loan if you have bad credit, but it's important to consider the risks and alternative options.

Sheryll Poe | 

Aug 9, 2022 | 4 min read

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Refinancing your car loan can be a smart financial decision, especially if you can qualify for a lower interest rate that saves you money monthly and over the life of your loan. But what if you have what lenders consider bad credit? Can you refinance a car loan with bad credit?

Can You Refinance a Car Loan with Bad Credit?

It's possible for lenders to consider car owners who may not have good credit for refinancing. While most lenders reserve their best interest rates for borrowers with a good or excellent credit score of 660 and higher, some lenders specialize in refinancing loans for borrowers with "fair" credit in the 580-669 credit range.

However, as with many auto loans, the lower your credit score, the higher the interest may be. So if the goal of refinancing is to get a lower interest rate, you might be disappointed. If your credit score hasn't improved since you took out the original loan, you may not find a better interest rate.

What are the Benefits of Refinancing with Bad Credit?

If you have a low credit score and refinance a car loan, one major benefit is the potential to lower your monthly payments. If you have several more years left on the loan and the interest rate is high, you might want to consider refinancing to potentially save money and reduce the monthly payment.

Another benefit could be paying a lower interest rate, which means you'll pay less over the loan term. If you had to take out a subprime loan with a high interest rate to buy the car originally, refinancing could save you money in interest fees (provided you don't extend the life term of the loan).

Conversely, you could also refinance the car to shorten the loan term and pay it off faster. Or, you might choose to refinance to remove a co-signer from the loan and take on the total debt yourself.

What are the Risks of Refinancing with Bad Credit?

As for the risks of refinancing your car loan when you have less-than-stellar credit, it could be more difficult to obtain refinancing, particularly if your credit hasn't improved. In fact, refinancing your loan will include a hard credit pull and will temporarily lower your credit score.

Second, regardless of your credit, there could be a prepayment penalty for paying off the loan early. The lower interest rate you may get through refinancing would need to offset any prepayment penalty you might incur to make the process worthwhile. Be sure to read your original loan contract carefully.

Third, refinancing could actually keep you in debt longer by extending the payment period of your loan because you'll pay more interest over the course of the loan.

Finally, you could become upside down on your car loan, owing more to the lender than what the car is actually worth. Cars are a rapidly depreciating asset, so the longer you're paying down a car loan and drawing out that debt, the more likely this risk could be.

How Do You Decide Whether Refinancing is Worth It?

Figuring out whether the lower monthly payment makes refinancing a car loan worthwhile depends on many factors, including the original loan terms, current interest rates, and any other factors that have changed.

The first step is knowing your credit score. If it's improved since you first took out the loan, you could qualify for a better, more competitive rate. Also, research current interest rates and shop around to get an idea of what a good interest rate is.

Finally, consider the length of the loan. If refinancing extends your payments significantly longer, even with a lower interest rate, it might not be worth it.

Lenders may offer online refinance calculators to help you figure out how much you might save. Be sure to have your current loan information, including loan term, annual percentage rate, monthly payment, and payoff amount handy. You can also pre-qualify for a refinance loan at the same time.

What are Some Alternatives to Refinancing?

If it's not the right time to refinance a car loan with bad credit, there are a few alternatives.

You could ask a trusted family member or friend with better credit to become a co-signer on the loan. Or, you could trade in your current car for a more affordable option and a new, better loan.

You could also talk to your lender about assistance programs that don't require refinancing. Or, you could wait a bit and work on your credit. Making consistent, on-time payments for 6-12 months can significantly improve your credit, making you eligible for a better interest rate.

Sheryll Poe

Sheryll Poe is a journalist and freelance writer based in Washington, D.C. where she writes about the latest news and trends in the automotive, finance, retail, and technology industries. With over two decades of experience, Sheryll has bylined hundreds of stories for websites, magazines, newspapers for trade associations and business clients. When not wielding words on behalf of clients, she enjoys cooking (and eating), watching bad reality television, and traveling the world.