Your car loan’s interest rate might be higher than you’d like, particularly at a time when inflation eats away at your paycheck. But if you had a “bad” credit rating when you got the car loan, that interest rate might have seemed like the best option you could get. If that’s the case, you might now be wondering whether refinancing your car with bad credit could be a more cost-effective move than keeping your current car loan.
The answer is that sometimes, refinancing bad credit can actually be a good idea. But you should proceed with caution. Here, you’ll find out if and how to do it.
Related: Does loan purpose matter?
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Can You Refinance Your Car Loan Even If You Have Bad Credit?
When you think about how to refinance a car loan with bad credit, you probably wonder first of all if it’s possible. You may even have been thinking, Will refinancing my car hurt my credit score even more?
The good news is that yes, you can often refinance your car, even with bad credit. Doing so can be a good idea, especially if you can get a cosigner whose credit is in good standing, if your credit has improved lately, and/or if car loan interest rates have dropped. There are also potential downsides to consider, of course. You’ll want to be aware of the cost of refinancing a car, taking into account any fees or prepayment penalties charged by your current lender. And refinancing your loan will temporarily lower your credit score–usually for no longer than about one year.
But overall, refinancing may be a way to lower your monthly auto loan payments, which could help you save money. Just remember it’s important to weigh the pros and cons of refinancing your car before you make the leap and sign up for a specific loan.
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What Is a Bad Credit Score?
You’ve probably researched what is a good credit score and not been thrilled with the answer. No one enjoys having the word “bad” attached to a record of their finances. What must first be understood is that the definitions are bestowed by credit agencies.
Three credit agencies–TransUnion, Equifax, and Experian–collect and store the information that helps potential lenders or employers rate your reliability. When you request an increase on your credit limit, apply for a loan, or apply for a new rental home or a new job, your credit report will likely come into play.
There’s no getting around the importance of credit. In the world of credit reports, “bad” is anything less than “good,” and it encompasses both “fair” and “poor.” And those two definitions cover a wide range. Trying to find an auto loan refinance for fair credit is different from searching for one when your credit is poor.
There are variations among the credit agencies, but here are the most common numbers for the credit scores.
Range Credit Score:
- 300-579 Poor
- 580-669 Fair
- 670-739 Good
- 740-799 Very Good
- 800-850 Excellent
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Is It Smart to Get an Auto Loan Refinanced With Bad Credit?
Financial advisors caution that someone with poor credit is unlikely to get an auto refinancing deal that will really help their situation. However, it might be possible to refinance auto loan with fair credit, which falls between 580 and 669.
About 17% of Americans have fair credit scores with a FICO Score in this range, according to Experian. Applicants with this score are still considered to be subprime borrowers, meaning their credit standing is less than what is normally desired. So, an auto loan for fair credit is by no means a sure thing, though they do happen. A cosigner with good credit can definitely help.
Apart from the score itself, other conditions can play a role in the decision.
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When Should You Refinance Your Car?
How soon can you refinance an auto loan? The best time to refinance your car, even with bad credit, is when the following situations apply.
- If Your Credit Score Has Improved. Ideally, you’ve been taking steps to improve your overall credit record by paying bills on time, reducing debt, and catching up on past accounts that are due. A higher credit score can improve your chances of qualifying for a loan with a lower interest rate and better terms. It’s helpful to check your credit score periodically, which you can do through many credit cards and financial institutions, to see where you are.
- When Interest Rates Are Dropping. Whenever car loan interest rates are down could be a good time to refinance your car. This is especially true if you have a few years left on your car loan and you can lower the interest by a few points. Refinancing to a rate that’s lower by 2 or 3 percentage points could result in savings that will really add up over the length of your loan.
- When Your Car’s Value Is Still High. Check out sites like Kelley Blue Book or Edmunds.com to see what your car’s current value is. If the car’s value has dropped significantly and you owe more than the car is worth, it’s usually not a good idea to refinance. If the car is holding its value, this may be a good time to refinance it, assuming that interest rates are lower than they were when you bought the car.
- If You’re Struggling to Make Your Car Payments. When your auto loan interest rate is very high and you still have a few more years left on the loan, refinancing could be an option to reduce your monthly payments and help free up some cash in your budget. You may want to seek out a service that will compare auto loan refinancing options for you.
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Comparing Auto Loan Refinance Lenders for Bad Credit
When you’re considering whether to refinance auto loan with fair credit or even poor credit, here are some tips to keep in mind. It’s especially important to do your research to find the best place to refinance auto loan with fair credit.
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1. Compare Multiple Loans
Don’t automatically settle for the first loan. Research to find the ones to help you lower your car loan payments.
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2. Examine the Interest Rates
This is a key point when comparing loans, especially when looking for an auto loan refinance for fair credit. You might want to look up what a good auto loan interest rate is these days. But remember you need to allow for your bad credit as well as factors like whether it’s for a new car loan, a used car loan, or a refinanced car loan.
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3. Look at the APR
The lender should provide you not only with what your monthly payment would be, but also the annual percentage rate (APR). This figure explains what you will be paying above principal every year and includes not only interest but also any fees.
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4. Consider the Length of the Loan
Your monthly payments and even your interest rate might seem a lot lower, but you’ll also need to look at the length of your refinanced car loan. You don’t want to find yourself with extended car payments that go beyond your initial loan and don’t ultimately save you money.
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5. Make Sure You Can Afford It
A great interest rate won’t help you if you still can’t pay the monthly payments on the loan, so be sure you understand what the bill will be every month.
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6. Ask About Promotions
First you might want to ask your current lender about refinancing and inquire about any promotions running. Take those numbers when you shop around with other lenders to see what they can offer you.
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7. Be Careful with Subprime Lenders
Lenders that specialize in refinancing for people with bad credit–particularly poor credit–may be appealing. But watch out: Some may be predatory and charge exorbitant interest rates. That’s another reason to be sure to do your research and compare options!
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The Takeaway
It may be possible to refinance auto loan with fair credit if you research your options and find a reputable lender that will work with you. Refinancing to a better rate after your credit score has improved and the interest rates have decreased can save you money in the long run. Using a cosigner who is in good credit standing might help you get a better rate and lower your monthly car payment.
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This article originally appeared on LanternCredit.com and was syndicated by MediaFeed.org.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)
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Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Personal Loan:
SoFi Lending Corp. (“SoFi”) operates this Personal Loan product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lenders/partners receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
Personal loan offers provided to customers on Lantern do not exceed 35.99% APR. An example of total amount paid on a personal loan of $10,000 for a term of 36 months at a rate of 10% would be equivalent to $11,616.12 over the 36 month life of the loan.
Student Loan Refinance:
SoFi Lending Corp. (“SoFi”) operates this Student Loan Refinance product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lender’s receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
Student loan refinance loans offered through Lantern are private loans and do not have the debt forgiveness or repayment options that the federal loan program offers, or that may become available, including Income Based Repayment or Income Contingent Repayment or Pay as you Earn (PAYE).
Notice: Recent legislative changes have suspended all federal student loan payments and waived interest charges on federally held loans until 05/01/22. Please carefully consider these changes before refinancing federally held loans, as in doing so you will no longer qualify for these changes or other future benefits applicable to federally held loans.
Auto Loan Refinance:
Automobile refinancing loan information presented on this Lantern website is from Caribou. Auto loan refinance information presented on this Lantern site is indicative and subject to you fulfilling the lender’s requirements, including: you must meet the lender’s credit standards, the loan amount must be at least $10,000, and the vehicle is no more than 10 years old with odometer reading of no more than 125,000 miles. Loan rates and terms as presented on this Lantern site are subject to change when you reach the lender and may depend on your creditworthiness. Additional terms and conditions may apply and all terms may vary by your state of residence.
Secured Lending Disclosure:
Terms, conditions, state restrictions, and minimum loan amounts apply. Before you apply for a secured loan, we encourage you to carefully consider whether this loan type is the right choice for you. If you can’t make your payments on a secured personal loan, you could end up losing the assets you provided for collateral. Not all applicants will qualify for larger loan amounts or most favorable loan terms. Loan approval and actual loan terms depend on the ability to meet underwriting requirements (including, but not limited to, a responsible credit history, sufficient income after monthly expenses, and availability of collateral) that will vary by lender.
Life Insurance:
Information about insurance is provided on Lantern by SoFi Life Insurance Agency, LLC. Click here to view our licenses.
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