February 14, 2019

Auto Refinance with Bad Credit: Is It Possible?

You don't need great credit to refinance your car loan. There are lenders out there that specialize in bad credit auto refinances. Sometimes your current lender may even help you with your situation.

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Unlike a home loan, you don't have to worry about appraisals or inspections. Yes, the lender will need to know the value of your car, but they can do that online in a matter of minutes. What it comes down to is finding the lender that will accept your circumstances.

Should you refinance your auto loan with bad credit? Keep reading to learn more.

Is It Hard to Refinance an Auto Loan with Bad Credit?

Even if you have bad credit, you may still be able to refinance your car loan. The trick is finding a willing lender. You may have better luck shopping for a car loan online or with a local credit union. Before you start shopping, check your credit reports. Find out how bad your credit really is and if there's anything you can change about it.

A few of the most common issues include:

  • Late Payments: If you are late on any of your loan or credit card payments, bring them current. It may be best if you wait a few more months and make on-time payments during that time as well. This will give your credit score a little time to improve.

  • High Utilization Rate: If you have a large amount of credit outstanding compared to your credit limits, it can hurt your credit score. Try paying your balances down or completely off if you can. You'll likely see an increase in your credit score quickly with this step.

  • Too Many Inquiries: If you know you want to refinance your auto loan, refrain from applying for any other credit in the months leading up to it. Lenders see inquiries as threats to your debt-to-income ratio. Because an inquiry could turn into a new loan that doesn't report on the credit report for a few months, lenders may be hesitant to refinance your auto loan.

Once you check your credit report and fix any of the above issues, you can start shopping for an auto refinance loan for borrowers with bad credit.

Do You Need Good Credit to Refinance a Car?
Good credit can help you secure better terms on your auto refinance loan, but it's not mandatory. The main factors that you need are stable employment, equity in your car, and no recent derogatory credit that could make a car lender worry about your ability to repay the loan.

When Should You Refinance Your Auto Loan?

Typically, the earlier you are in your auto loan's term, the more benefits you'll see in refinancing. This is due to the way interest works on an auto loan. You only pay interest on the outstanding principal balance. At the start of the loan you'll owe more interest than you will as you pay the balance down. You'll save the most money on interest if you refinance your auto loan near the start of the loan.

If you wait until you pay the loan's balance down, the interest savings won't be as great, even if you can secure a lower rate. In some cases, waiting too long can leave you upside down on your loan, which means you owe more than it's worth. At that point, lenders won't even allow you to refinance.

Can You Refinance an Auto Loan if You Are Behind on Payments?

Typically, refinancing your auto loan if you are behind on payments is an issue, unless you stick with the same lender. It's always a good idea to get in contact with your auto lender right away when you fall behind on your payments. In fact, if you know you'll fall behind, contacting them ahead of time can be even more beneficial.

Lenders will sometimes offer some options to help you get ahead:

  • Loan Extensions: If you get in contact with your lender quickly enough, they may be able to defer your payments temporarily. They usually offer this option when something outside of your control occurs, such as a sudden illness, death, or job loss. Lenders typically tack the deferred payments onto the end of the loan, extending your term.

  • Refinance: You may be able to refinance your auto loan with the same lender if you are behind on your payments. If a lender wants to avoid repossessing your car and can help you get lower payments by refinancing, they may offer this option. You may have to take a higher interest rate, but it can lengthen the term, which lowers your monthly payment.

Improving Your Chances of a Refinance with Bad Credit

If you have bad credit and you need/want to refinance your auto loan, you can increase your chances with some or all of the following:

  • Dispute Errors on Your Credit Report: Take the time to check your credit report before applying for the refinance. If you notice any incorrect information, write a dispute letter to the credit bureau and include any evidence you have supporting your claim. The credit bureau has 30 days to verify and/or correct the information.

    The most common error on a credit report is a false inquiry. To find out how to get these removed from your credit report, check out our article
    Credit Inquiry Removal Letter

  • Improve Your Credit Score: If you can improve your credit even a little, it can help improve your chances of refinancing. Bringing late payments current, paying down your balances, and avoiding new inquiries can help increase your chances of approval.

  • Be Honest with Lender: Even though your current lender's interest rate is the one you are trying to get rid of, this lender could be a good resource. Let your lender know that you want to refinance. It helps if you have had current payments over the last 6 - 12 months when you do this. Your lender may offer a competitive refinance interest rate in order to avoid losing your business.

  • Shop Around: It's always a good idea to shop around for the best rate. If you let lenders know you are shopping the rate, you may have a better chance of negotiating lower interest rates. Since the point of refinancing is usually to save money either monthly or over the life of the loan, this step can help you reach your goal.

Bottom Line

Refinancing your auto loan with bad credit isn't impossible, but it may take a little time. Before you do, make sure the savings are worth it and that you aren't just extending your term and paying more interest over the life of the loan.

More from CreditDonkey:

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