How to Refinance a Car Loan With Bad Credit

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Refinancing a car loan can be tricky, especially if you have a lower-than-average credit score. Many people looking to get a better monthly payment on their vehicle consider the refinancing process, although this can be easier said than done. If you have been wondering how to refinance a car loan with bad credit, this post will be a great starting point for you. We're here to break things down for people in this situation, so please continue reading!

What is Car Loan Refinancing?

Car loan refinancing is the process of replacing your current loan with one that has better terms. For instance, car loan refinancing would be a smart idea if you had a subprime credit score when applying the first time (between 580 and 669) and now have a better score closer to 700.

Just like when buying a home and applying for a mortgage, your vehicle goes through a similar process. Car loan refinancing is a great way to lower monthly payments and the total interest paid over the term of your loan, and the team at Granite Hyundai in Somersworth, NH, is more than happy to get you moving in the right direction.

Can You Refinance With Bad Credit?

Yes! You can certainly refinance a car loan with bad credit. However, doing so will be riskier, as your original score might not have been much lower, but you can try to secure a lower payment/APR. Our general suggestion would be to add a cosigner and see if that helps, although this is a gamble.

How Refinancing Can Lower Monthly Payments

Refinancing your car, truck, or SUV can be an easy way to lower monthly payments and reduce the total interest you pay on the loan. Of course, you won't always get a significantly better payment if you have bad credit, but every dollar counts in the grand scheme. As we mentioned above, refinancing your car loan replaces your current loan with an improved one, so you start fresh with whichever creditor or loan provider you choose.

The Role of Credit Scores in Refinancing

Your credit score plays a major role in the car loan refinancing process. The general rule is that people with higher scores (700+) receive the lowest APR and monthly payments, so building credit is vital.

Here are the credit score tiers you fall into:

• Poor: 300-579
• Fair: 580-669
• Good: 670-739
• Very Good: 740-799
• Excellent: 800-850

When refinancing, you might also hear the terms "prime" and "subprime," with subprime referring to a score lower than fair and prime referring to good to very good. Super-prime credit is anywhere from 720+, so that is the goal for most people refinancing.

How to Refinance a Car Loan With Bad Credit

For those wondering how to refinance a car loan with bad credit, there are steps you can take to improve the process. Of course, building credit and proving to loan providers that you have the income and financial management skills to repay a loan in full is a great start. Below, we have outlined a list of tips and ideas to try before you begin the refinancing process.

1. Check Your Current Credit Score

The first thing you should do if you want to refinance your car loan is check your current credit score. The three main credit reporting agencies are Equifax, Experian, and TransUnion. Additionally, there is a free FICO score checker on myFICO.com, which is an easy place to begin your journey. You can monitor your credit in the months leading up to your refinance application with websites and apps like Credit Karma, all of which we recommend keeping up to date with.

2. Review Your Current Loan Terms

Another important step when refinancing a car loan is to review your current auto loan's terms and conditions. You might notice something you want to improve the next time, such as monthly payments, loan duration, or interest rates. Nobody likes paying more for the same thing!

3. Improve Your Credit Score if Possible

It goes without saying that credit repair is the best thing you can do before refinancing your car loan. The higher your score, the more trustworthy and lender-friendly you become, especially for significant purchases like cars, trucks, or SUVs. Many people forget that a vehicle is a multi-thousand-dollar investment, so a creditor has more at stake if you cannot pay them back.

4. Get Prequalified

Getting prequalified for an auto loan is a great way to determine whether the refinancing process is right for you. Some of our shoppers improve their credit score after their original purchase and can secure better rates through different loan providers, often by first getting prequalified.

5. Compare Loan Offers

Loan shopping is something we all do, especially during the refinancing process. You might prefer to go with your bank for auto refinancing, an in-house loan servicer, a local credit union, or a private-party auto loan, all of which offer different terms. Ask around, try to get prequalified, and see who offers the best payments and interest rates.

6. Apply for Refinancing

Once you have completed all the steps mentioned above, it is time to apply for auto loan refinancing. Assuming you have improved your financial and debt-to-income situation, your new loan will likely have better terms, faster repayment, and lower monthly costs, which is why you are likely refinancing.

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Tips to Increase Approval Chances

In addition to our steps that guide you on how to refinance a car loan with bad credit, the team at Granite Hyundai has some tips to increase your chances of approval. We will detail these below, all proving important from a loan provider's point of view and ultimate decision. Remember, the best way to refinance a car is to have better credit than before. However, if you can at least follow some of these steps, bad credit may not apply as seriously.

Adding a Cosigner

When trying to refinance a car loan with bad credit, the first thing to consider is adding a cosigner. This is someone with better credit than you who tells the loan provider they will step in and take over your payments if you cannot finish them. Of course, you aren't going to hand someone else your monthly bill, but from a bank or financial institution's view, a cosigner works as collateral if something goes wrong. They always need to know someone has the resources to pay them their money.

Demonstrating Stable Income

Another way to get a better auto loan through refinancing is to demonstrate stable income. Suppose you have received a pay raise since the first time you applied for your car loan. In that case, a loan provider will see you have more money in your pocket each month and may choose to overlook your less-than-stellar credit score. Having your job for multiple years is also very good for creditors because it shows them you are responsible.

Reducing Your Debt-to-Income Ratio

The debt-to-income ratio compares your monthly gross income to the bills and debt you have to pay back with it. Your auto and home loans are likely your largest debts, so they play the most significant role in debt-to-income. Try not to have outstanding debts that you cannot or do not pay when refinancing.

Pros and Cons of Refinancing With Bad Credit

Getting into the pros and cons of refinancing a car loan with bad credit, you have possible risks and rewards. For your pros, it is likely that with better income, a lower debt-to-income ratio, and a cosigner, a bad credit score can still get you refinanced for less money each month and better overall terms. You can work with an in-house dealership credit program to help improve your score and refinancing chances, like the one we have here at Granite Hyundai in Somersworth, NH.

The cons of refinancing a car loan with poor credit are that your score takes another big hit in the form of a hard inquiry and gets lower. You might also not get approved, which can be disheartening for anyone trying to improve their loan terms. The best thing to do is to build your credit before applying for new financing.