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Auto Refinance With Bad Credit

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Are you hoping to replace your existing car loan with another — maybe at a better rate? It makes sense if it reduces your car payment and doesn’t require paying a hefty penalty or fee, but trying for an auto refinance with bad credit can be challenging. However, depending on the situation, there may be ways to make it work for you.

Here are some tips for borrowers trying to refinance an auto loan when they have poor credit.

How to get your best auto loan rates with bad credit

Make sure your credit report is accurate

Lenders automatically sort auto loan applicants into tiers based on credit scores, which is why it’s important to make sure there aren’t any mistakes dragging your score down. About 20% of credit reports had an error, according to the Consumer Financial Protection Bureau. You can receive one free credit report a year from each of the  three major credit reporting bureaus. Go to to request one — they are available weekly, free, through April 2021.

If there is an error, here’s how to dispute it. If there isn’t, getting your credit report could still help you by letting you prove you made payments on time.

Prove you paid your auto loan payments on time

Even if you have bad credit, showing that you made car loan payments on time can work in your favor. Lenders will look at your credit record, not just your credit score. If you’ve made on-time payments to any type of installment loan, especially a car loan, it could help you to get approved for a bad credit car loan or get a better rate on one.

Prove you can afford refinancing your auto loan

After looking at your credit score and credit history, the next best thing you can do to prove you’re worthy of a loan is to show that you can afford the car payment.

Lenders like to see that you’d be able to repay a bad credit car loan. To do this, they’ll look at your debt-to-income ratio (DTI), a number that shows how much you spend compared to how much you make. To verify your debt, the lender will look at your credit report and may ask how much you pay each month for rent or mortgage, but in most cases they won’t include it in your DTI calculation. You could improve your DTI by paying down debt, such as credit card bills.

To verify your income to the lender, one of the documents you should have ready is proof of income. There are many ways you could show your income, but the most common way is to come with your last two paycheck stubs or three months of bank statements showing deposits.

Consider a credit union or low-income lender

If you’ve explored refinancing a car loan through traditional lenders and have been turned down, look at applying through a credit union or low-income lender. Credit unions have members rather than customers, and may offer more personalized services to help with the challenges their members often encounter, such as limited or negative credit situations.

Alternatives to an auto refinance with bad credit

Loan modification

If you’re 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 build your credit score. Ask the lender what criteria you need to meet to reapply. 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.

Bad credit auto refinance FAQs

Does refinancing a car hurt your credit?

In the long run, refinancing a car can help your credit. In the short run, though, your credit may go down.

It can take a few months for your old lender to report to the credit bureaus that you paid off the original loan and when you apply for bad credit auto refinance, the credit inquiries will bring down your score slightly.

However, if you put in multiple car refinance applications, the activity will not hurt your credit any more than one application as long as you do all of them within a 14-day window. Consumers have this window so they can rate shop for loans without undue penalty.

What are the best places to refinance auto loans?

Auto Approve, rateGenius and RefiJet are some of the best auto refinance lenders. Honorable mentions include Capital One auto refinance and Navy Federal Credit Union auto refinance.

When should you refinance your car loan?

You could refinance your car loan at any time — however there are better and worse times to do so. Better times include when it’s been six months to a year after you first took out the car loan, when you’re not underwater on the loan and when national consumer loan rates are down. Here’s when to refinance an auto loan.

Could I get a cash-out auto refinance?

There are cash-out auto loans available. However, you should be careful — if you borrow more than what the car is worth, you might pay more than you have to for the auto loan, as doing this may push up your auto loan rate.


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