How to Refinance a Car Loan With Bad Credit
Refinancing a car loan can be a smart financial move, but it becomes more challenging when you have bad credit. While there’s no universal minimum credit score required to refinance your car loan, getting approved with bad credit is possible. However, just because you can refinance doesn’t mean you should. At O1ne Mortgage, we understand the complexities of refinancing with bad credit and are here to guide you through the process. Call us at 213-732-3074 for personalized assistance.
Steps to Refinance a Car Loan With Bad Credit
Building your credit takes time, but if you need better terms now, it could be worth exploring your options. Here are the steps you can take to refinance your car loan:
1. Research Potential Lenders
Finding auto lenders willing to work with bad-credit borrowers can be challenging. Take your time to research lenders online to get an idea of which ones offer good approval odds. Also, consider contacting your local banks and credit unions to see what your options might look like. Note that lenders will have other eligibility criteria beyond your credit score. For instance, if you have an older vehicle, you may have fewer options due to mileage or age limits.
2. Compare Rate Quotes
Once you have a list of potential lenders, see if you can get prequalified with each one to get an idea of what your loan terms might look like. This process typically doesn’t involve a hard credit inquiry, so it won’t impact your credit score. In addition to the annual percentage rate (APR), consider monthly payments, potential fees—including possible prepayment penalties—repayment terms, and the lender’s policies for delinquencies and loan default. All these factors can help you decide whether refinancing your car will make financial sense for you.
3. Submit an Application
After narrowing down your list of options to a single lender, you can typically submit an application through the lender’s website, over the phone, or in person. You’ll likely need to provide information about yourself and your vehicle, including a 10-day payoff statement and the contact details for your current lender.
4. Review the Loan Agreement
If you’re approved for a car refinance loan, carefully read the loan agreement to ensure you understand all the terms and conditions. If you can get better loan terms than what you currently have, you can choose to accept the loan. Otherwise, it may make sense to improve your credit score before you apply again.
Potential Downsides of Refinancing With Bad Credit
Even if you qualify for an auto refinance loan, you may not want to go through with it until your credit is in better shape. Here are some potential drawbacks of refinancing with bad credit:
- Increased Monthly Payments: Depending on your current loan’s interest rate compared with the new one, your monthly payment could end up higher instead of lower, making it difficult to keep up with payments.
- Higher Overall Cost: Even if you qualify for a lower rate and monthly payment, the loan could become more expensive if you extend your repayment term beyond its current end date.
- Risk of Losing Your Car: If your new monthly payments are unmanageable and you miss payments, the lender will typically repossess the vehicle and sell it at auction.
Alternatives to Refinancing Your Car Loan
Depending on your reasoning for refinancing, it may be worth considering other options:
Contact Your Lender
If you’re thinking about refinancing because you can’t afford your monthly payment, consider contacting your current lender to see if you can get some relief in the form of a short-term deferment or a loan modification.
Trade in Your Car
If your monthly payments are too high, another option is to trade in your car for a less expensive vehicle. This may only make sense if you have positive equity in the car—meaning it’s worth more than what you owe. If you have negative equity, rolling the remaining balance into the new loan could result in a higher payment.
Consider a Different Loan Option
If you’re thinking about a cash-out refinance loan to tap some of the equity in your car, consider other options, such as an emergency loan. You could even ask a family member or friend to help you qualify for a low-interest personal loan as a cosigner.
How to Improve Your Credit
Improving your credit score can increase your chances of getting approved for an auto refinance loan. Here are some ways to improve your credit:
Make All Payments on Time
The most important factor in your FICO® Score is your payment history, so make it a priority to pay all your bills on time. If you have any accounts with past-due payments, get caught up quickly to avoid further damage to your credit score.
Pay Down Credit Card Debt
Another influential component of your credit score is your credit utilization rate, which measures the amount of credit you’re using on credit cards against your total credit limit. The lower your card balances are relative to their credit limits, the better it is for your credit score.
Get Added as an Authorized User
If you have a loved one who has a credit card they’ve never missed a payment on, ask if they’ll add you as an authorized user. Once they do, the full account history will appear on your credit reports, which can help improve your credit score.
Avoid Unnecessary Debt
Anytime you apply for credit, the lender is likely to run a hard inquiry, which can temporarily drop your credit score by a few points. Also, when you open a new credit account, it lowers the average age of your accounts, which impacts your length of credit history. As such, it’s crucial that you avoid applying for debt unless you need it.
As you take these and other steps to improve your credit score, you’ll have a better chance of getting approved for an auto refinance loan, as well as other loans.
Frequently Asked Questions
What Credit Score Do You Need to Refinance Your Car?
There’s no universal minimum credit score required to refinance your car loan, but having a higher score can improve your chances of getting better terms.
Does Refinancing Hurt Your Credit?
Refinancing can temporarily lower your credit score due to the hard inquiry and the new account’s impact on your credit history. However, the long-term benefits can outweigh the short-term dip.
Do You Need a Down Payment to Refinance a Car?
Typically, you don’t need a down payment to refinance a car loan, but it depends on the lender’s requirements.
Monitor Your Credit Regularly to Maintain a Good Credit Score
It’s generally a good idea to build your credit before applying for a loan, but to avoid being in the same position later on, it’s crucial that you continue to practice good credit habits to maintain that improved score. One way to do this is to monitor your credit regularly. With Experian, you’ll get free access to your FICO® Score and your Experian credit report, along with real-time updates when there are changes to your Experian credit report, such as new accounts, inquiries, and changes to your personal information.
As you build your credit score and continue to monitor it, you’ll have a better idea of what’s impacting your credit score, so you can address potential problems quickly. For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate the complexities of refinancing and find the best solution for your financial situation.
