How to Refinance Your Auto Loan With Bad Credit

Are you hoping to replace your existing car loan with another -- maybe at a better rate? It makes sense if it reduces a car payment and doesn't require paying a hefty penalty or fee, but trying to refinance your car with bad credit can be challenging. However, depending on the situation, there may be ways to do so. Here are some tips for borrowers trying to refinance an auto loan when they have poor credit.

Make Sure Your Credit Record Is Accurate

Borrowers thinking about refinancing an auto loan with a poor credit record and low score first need to review both of these items carefully.

Your credit score is a very important element of your application to refinance your car loan. While borrowers in the lowest credit score tier (below 590) may still qualify for a car loan and possibly a refinance, they'll pay the highest rate, currently about 17 percent.

Credit scores are used by lenders as an indication of the risk of lending money to a borrower, and  can also influence the rate and payment terms of loans, including a car refinance. Confirming your credit score, and exactly what loans, lines of credit, credit cards, mortgages, and other information is on your credit file can help you determine what has caused your "bad credit" score so you can work on fixing any errors or repairing issues before trying to refinance your car with bad credit.

Borrowers in the United States are entitled to one free credit report each year. It will include information from the three main credit bureaus – Experian, Equifax, and Transunion. You can also get your credit score for free and track your progress in improving it at LendingTree.com.

Prove You Paid Your Auto Loan Payments On Time

Bad credit happens for many reasons, including divorce, illness, and loss of employment. Once you've verified your credit score and reviewed your report, it's time to apply for a car refinance loan. If borrowers can show that despite a poor credit score, they made the payments on their original car loan on time and in full, it may improve the chances of refinancing. This is also a good time to show proof that you've been making an effort to pay down delinquent balances and are staying on top of all of your outstanding payments, and that you have a handle on the situation that led to the credit problems, or have made progress in managing your credit responsibly.

Prove You Can Afford Refinancing Your Auto Loan

If you have verifiable steady income, and can show proof that your income can support refinance payments along with your other regular obligations, you may be able to qualify for a refinance even if your credit is less than stellar.

Borrowers considered higher risk who continue paying bills on time, "keep delinquent balances in check," and are willing to choose a vehicle that fits their budget should be able to get the financing they need, said credit bureau Experian's senior director of automotive financing, Melinda Zabritski, in an Experian Automotive press release - good news for potential refinancers.

Borrowers looking for an auto refinance for bad credit should also be aware that depending on their actual credit,  they may be required to show proof of income to their lender.

Consider a Low-Income Lender

Borrowers who've explored refinancing a car loan through traditional lenders and are being turned down due to their poor credit may want to look at applying through a  low-income lender or credit union. Created to serve people who have traditionally been "underserved" by traditional banks, credit unions with the "low-income" designation may offer services to help with the challenges their members often encounter, such as limited or negative credit situations.

Look into Loan Modification

If you are having a hard time making your car payments and can't (or don't want) to go through a refinance application, loan modification may be the answer. With loan modification, your lender may lengthen your term to reduce your current payments, or let you add missed payments to the end of the term (this is called forbearance). In either case, you'll pay more interest in the long run, but get some breathing room in your budget right away. Contact your lender as soon as possible to inquire about this --  they are more likely to help early on in your troubles than if you request a modification after several missed payments.

Wait it Out

If your request to refinance an auto loan is denied because of your bad credit, there may be no option other than taking the time to rebuild your credit score and improve your record. Ask the lender what criteria you need to meet to re-apply. Use this time to steadily pay down outstanding debt and make all payments in full and on time. Check your credit score and credit report periodically, and when you meet the conditions set by your lender, give it another shot.

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