How to refinance a car loan with bad credit

Have you ever wondered if you could refinance a car loan with bad credit? The answer is yes, you absolutely can. Under the right circumstances, refinancing can help you negotiate better terms and save money.

However, car loan refinancing is not for everyone. Unless you meet certain conditions, you might not get the interest rate you want. So, before trying to get a new car loan, consider some factors so you can make an informed decision.

Read on to learn about the requirements for refinancing a car loan, the steps in the refinancing process, the benefits of negotiating a new car loan, and more.

What are the requirements for refinancing a car loan with bad credit?

A question car owners often ask is, “What credit rating do I need to refinance a car loan?” The answer is not always simple.

There is no universal minimum credit score to determine your eligibility. Car owners could potentially get a refinance offer even with credit scores below 580, which is considered bad credit. This is because lenders may have different requirements for approving your new loan.

They also consider many other factors to calculate the risk involved when negotiating a new loan, such as:

  • Revenue: The amount of money you earn tells the auto refinance lender if you have enough money to pay off the money you owe. Just like when you took out the original auto loan, the higher your income, the higher your chances of being approved for the auto loan refinance.
  • Debt to income ratio: Your debt-to-income ratio (DTI) is a percentage based on the sum of your monthly debt payments divided by your monthly income. In this scenario, “debt” means everything you pay monthly, including rent or mortgage. So if you owe $1,000 in loan payments plus a monthly mortgage of $1,000, your debt is $2,000 per month. If you earn $5,000 in income over the same period, your DTI would be 40%. In most cases, such a low DTI would help your refinance case.
  • Loan-to-value ratio: The loan to value ratio (LTV) is a percentage that measures the cash value of your vehicle compared to the dollar value of your loan. A lower LTV is better because it means you owe less on your loan balance than the value of the vehicle. On the other hand, a higher LTV could make it harder to get approved for a car loan refinance.

That being said, you want to get your credit rating as high as possible before you go ahead with refinancing your car loan. People with higher credit scores improve their chances of getting lower interest rates. You can also avoid having to get a co-signer for your refinanced auto loan.

How to refinance a car loan with bad credit in 5 steps

If you’ve decided to refinance your car loan, follow these steps to ensure you get the best deal possible:

1. Check your credit score

First, visit to see where you stand on credit. Through this website, you can access your reports from the three major credit bureaus Equifax, TransUnion, and Experian without affecting your credit score. Weekly reports are available free of charge until the end of 2022.

One thing you want to check is if your score has improved since you took out the car loan you want to refinance. If so, you can feel more confident in your eligibility for refinancing with better terms.

Another thing to look for is any inaccurate or outdated data. Specifically, try to identify missed payment claims or activity related to accounts that don’t belong to you. If you find something wrong, contact the credit bureaus to file a dispute. Each has an online portal to submit and resolve issues.

2. Compile your information

Next, compile all of the documentation you might need to apply for a car loan refinance. You will need these documents to prove to the lender your identity, your credit score and the value of your vehicle:

  • Identification data: Include official documents to verify your name, address, phone number, income, employment, and social security number. Your driver’s license, identity card, bank statements, employment contract, social security card and birth certificate are examples of documents you can use.
  • Loan information: Documentation of your existing loan is essential for refinancing. The documents you include must show the identity of your lender, your loan account number and the amount of the vehicle repayment.
  • Car Information: Finally, you will need documents verifying your vehicle information, such as the registration number, vehicle identification number, and the make, model, and year of the car.

3. Consider your options

Now you can shop around for the best refinancer. Your current lender is a good place to start. If they offer refinance options for auto loans, working with them can make the process easier. After all, they already know who you are and have your information in their database. In some cases, working with your current lender can get you the best rates.

Even if your lender offers a good deal, research other options before making your final decision. Consider a reputable bank or credit union in your area and also research lender rates online.

4. Apply for rates

Auto refinance lenders often post promotional rates to attract potential borrowers. To understand exactly what to expect from each lender, apply to each one you like. You will not accept every lender’s offer. You just need to know what rates they intend to give you.

Major bureaus encourage this type of comparison shopping by allowing consumers to submit multiple requests within 14 days. If you stay within this period, your credit score doesn’t take a hit.

5. Choose the best lender

After comparing the offers from your potential lenders, choose the one that offers the best terms for your needs. Because you’ve already submitted an application, all you have to do is sign up with your preferred lender. As for the others, just let their offers run out.

Your new lender will have received your documentation and should handle much of the process from now on. They usually pay off your existing loan, although some lenders give you the money to transfer to your previous lender instead.

Why refinance a car loan with bad credit?

Vehicle owners may decide to refinance their auto loans for a variety of reasons:

Lower monthly payments

The most common reason to refinance a car loan is to lower your monthly payment. Refinancing involves replacing your existing loan with a new one. If you can extend the term of the loan through refinancing, you may end up paying less in principal each month. Plus, if you qualify for a lower interest rate, you’ll pay less in the long run.

Either way, you’ll have an easier time keeping track of your monthly car payments. However, if you extend the term of your loan, you may end up paying more interest overall.

Better credit score

Lower monthly payments can lead to a second refinancing driver: improving your credit rating. Here’s how it works:

  1. When you’re not struggling to pay off your monthly debts, you’re less likely to miss payments.
  2. As you continue to meet your loan requirements, you prove that you are a reliable borrower.
  3. As a result, your credit rating is likely to increase. In fact, if you pay off your auto loan without fail, your credit score has probably already gone up.


Ideally, lower monthly payments from refinancing allow borrowers to set aside additional cash. These ongoing money-making opportunities can lead to positive results. Over time, you can use accumulated savings to pay for other expenses, including emergencies.


A temporary benefit of refinancing is the potential reprieve from car loan payments. Refinancing a loan is a time-consuming process. It is not uncommon for several months to pass between the start of an application and the effective date of your new loan.

During this time, you get some debt relief. Take advantage of the reprieve by saving your earnings so that you’ll be in better financial shape when your payments start again.

Eligibility for Future Loans

While you’re building your credit score, you’re also preparing for future financial benefits. You will find it easier to get loan approval with preferential interest rates. These loans help establish a positive cycle of credit building.


Sometimes unexpected events in your life lead to expenses that you are not prepared for. When this happens, you need cash fast. Some lenders offer borrowers the option of cashing in the equity in their vehicle. However, this is generally only advisable if you have initially paid a large deposit.

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