Refinancing a car loan with bad credit is possible, but you will pay higher interest rates and face stricter terms than borrowers with good credit
Refinancing means replacing your current car loan with a new one, usually from a different lender. The new loan pays off the old one, and you start making payments to the new lender instead. With bad credit, lenders see you as higher risk, so they charge more to lend to you. The interest rate on a bad-credit refinance is typically several percentage points higher than the rate someone with good credit would receive.
The math still works in your favor if your current rate is very high and you have enough equity in the car — meaning the car is worth more than you owe. If you owe $15,000 on a car worth $18,000, you have $3,000 in equity. A lender may refinance you at a lower rate because they can recover their money if you stop paying. If you owe more than the car is worth, refinancing becomes much harder.
Bad credit refinancing is not a quick fix. It takes time to find a lender willing to work with your credit history, and the process itself takes one to two weeks. You should only refinance if the new rate is meaningfully lower than your current rate — usually at least 1 to 2 percentage points lower — because refinancing costs money in fees and closing costs.
Key Takeaways
- Refinancing with bad credit requires you to have positive equity in the car, meaning it is worth more than you owe on the loan.
- Interest rates for bad-credit refinances are typically 2 to 5 percentage points higher than rates for borrowers with good credit, depending on how low your score is.
- Credit unions often offer lower rates than banks or online lenders for borrowers with bad credit, especially if you are a member.
- Refinancing costs money in fees and closing costs, so the new rate must be meaningfully lower than your current rate to make financial sense.
- Your current lender may have a payoff penalty, so ask about it before you start the refinancing process.
What lenders look for when you have bad credit
A lender with bad credit will focus on the car itself and your equity in it, not just your credit score. They want to know: Is the car worth enough to cover the loan if you stop paying? How many miles are on it? Is it paid off on time by the previous owner? A car with 40,000 miles and a clean history is easier to refinance than one with 120,000 miles or a salvage title.
Lenders also look at your current payment history on the loan you want to refinance. If you have been paying on time for the last 12 months, even with bad credit, you are a better candidate than someone who has missed payments recently. Some lenders require you to have made at least 12 on-time payments before they will refinance you. Others will work with you sooner if your equity is strong enough.
Your income and debt-to-income ratio matter as well. Lenders want to see that you earn enough to handle the new payment. If you have multiple other debts — credit cards, personal loans, medical bills — a lender may decline you or offer a higher rate because your monthly obligations are already high.
Where to find bad-credit car refinance lenders
Credit unions are often the best starting point. If you belong to a credit union, ask whether they refinance car loans and what their rates are for borrowers with bad credit. Credit unions typically charge 1 to 3 percentage points less than banks or online lenders for the same credit profile. You do not have to be a member to join many credit unions — some are open to people who work in a certain industry, live in a certain area, or belong to a certain organization.
Banks that offer car refinancing include most large national banks and many regional banks. Call or visit their website to ask about bad-credit refinancing. Banks are usually stricter about credit scores than credit unions, but some have programs for borrowers with scores in the 600 to 650 range. Expect to provide documentation of income and employment.
Online lenders specialize in bad-credit loans and can move quickly. Companies like LendingClub, Upgrade, and others advertise bad-credit car refinancing. Online lenders often have higher rates than banks or credit unions, but they may approve you faster and with less paperwork. Read reviews and check whether the lender is licensed in your state before you explore.
Your current lender may refinance you with them. Some lenders will lower your rate if you have been a good customer, even with bad credit. It is worth asking, because you already have a relationship with them and they already know your payment history.
Documents and information you will need
Lenders will ask for proof of income, usually your last two pay stubs or tax returns if you are self-employed. They will also ask for proof of residence, such as a utility bill or lease. You will need your driver's license and Social Security number.
Have your current loan documents ready. The lender will want to know the exact payoff amount, the current interest rate, and how many payments you have left. You can get this from your loan statement or by calling your current lender. Some lenders will pull this information themselves, but having it ready speeds up the process.
You will also need the vehicle identification number (VIN), which is on your registration and dashboard. The lender will use this to verify the car's value, mileage, and title status. If the car has a lien on it — which it does if you still owe money — the lender will handle paying off that lien as part of the refinancing.
How interest rates and terms differ by credit score range
Interest rates for car refinancing vary widely depending on your credit score, the car's age and mileage, and how much equity you have. The ranges below are typical but not may provide, and rates change based on market conditions and individual lender policies.
| Credit Score Range | Typical Interest Rate Range | Where You Might Find These Rates |
|---|---|---|
| Below 580 | 10% to 18%+ | Specialized bad-credit lenders, some credit unions |
| 580 to 619 | 8% to 14% | Credit unions, online lenders, some banks |
| 620 to 659 | 6% to 10% | Banks, credit unions, online lenders |
| 660 to 699 | 4% to 7% | Most banks and credit unions |
Loan terms typically range from 36 to 72 months. A longer term means a lower monthly payment but more interest paid overall. With bad credit, lenders often push you toward shorter terms — 48 to 60 months — because they want to reduce their risk. A shorter term also means you pay less interest, even at a higher rate.
Fees and costs that come with refinancing
Refinancing is not free. Most lenders charge an origination fee, which is a percentage of the loan amount, usually 1% to 5%. On a $15,000 loan, a 3% origination fee is $450. Some lenders also charge a documentation fee, a processing fee, or a title transfer fee. These can add $100 to $500 to your total cost.
Your current lender may charge a prepayment penalty if you pay off the loan early. This is a fee they charge to compensate for the interest they lose. Not all lenders charge this, and some cap it at a certain amount. Call your current lender and ask whether there is a prepayment penalty and how much it is. This cost needs to be factored into whether refinancing makes sense.
To know whether refinancing is worth it, calculate your total savings. If your current rate is 12% and you can refinance at 9%, and you have 36 months left on the loan, use an online calculator to see how much interest you will save. Subtract the refinancing fees from that savings. If you save $1,500 in interest but pay $400 in fees, your net savings is $1,100. If the savings are less than $200 to $300, refinancing probably is not worth the effort.
Steps to take before you explore
Check your credit report before you start. You can get a free report from each of the three major credit bureaus — Equifax, Experian, and TransUnion — once per year at annualcreditreport.com. Look for errors, such as accounts that are not yours or payments marked as late when you paid on time. If you find errors, dispute them with the bureau. Correcting errors can raise your score by 10 to 50 points, which can lower your refinancing rate.
Pay down other debts if you can. Lenders look at your debt-to-income ratio, which is the total of all your monthly debt payments divided by your gross monthly income. If you can pay off a credit card or personal loan before refinancing, it lowers this ratio and makes you a better candidate for a lower rate.
Make sure you are current on your car payments. Being behind on your current loan makes refinancing much harder or impossible. If you are behind, contact your current lender about a payment plan before you try to refinance.
Shop around with at least three lenders. Each lender will do a hard inquiry on your credit, which temporarily lowers your score by a few points. However, multiple inquiries for the same type of loan within 14 to 45 days (depending on the credit bureau) count as a single inquiry. This means you can shop without taking a big hit to your score.
What happens after you are approved
Once you are approved, the new lender will contact your current lender to get the exact payoff amount and arrange payment. The new lender sends the payoff amount directly to your current lender, and your old loan is closed. You then make payments to the new lender according to the new loan terms.
The title transfer happens at the same time. Your current lender holds the title as collateral. When the new lender pays them off, the title is released and transferred to the new lender. You do not need to do anything — the lenders handle this. The whole process takes one to two weeks from approval to the first payment to the new lender.
Keep making payments to your current lender until you receive written confirmation that the loan has been paid off and transferred. Do not assume the transfer is complete just because you were approved. Some borrowers have made double payments by accident because they did not wait for confirmation.
Frequently Asked Questions
Can I refinance if I owe more than the car is worth?
It is very difficult. If you owe $18,000 on a car worth $15,000, you are "underwater" on the loan. Most lenders will not refinance an underwater car loan because they cannot recover their money if you stop paying. Some credit unions and specialized lenders will refinance underwater loans, but they charge much higher rates — often 2 to 4 percentage points higher than they would for a car with positive equity.
Will refinancing hurt my credit score?
Refinancing causes a small, temporary drop in your credit score because the lender does a hard inquiry and you are opening a new account. The drop is usually 5 to 10 points and recovers within a few months. The long-term impact is positive if you lower your interest rate and pay on time, because you are reducing your overall debt and building a history of on-time payments.
What if I have missed payments on my current loan?
Refinancing is much harder if you have recent missed payments. Most lenders require you to be current on your loan and to have made at least 12 on-time payments in a row. If you have missed payments, focus on getting current and building a clean payment history for at least a year before you try to refinance.
Can I refinance multiple times?
Yes, but each refinance costs money in fees and causes a hard inquiry on your credit. Refinance only when the new rate is meaningfully lower than your current rate — at least 1 to 2 percentage points. Refinancing every few months to chase small rate drops will cost you more in fees than you save in interest.
What if no lender will refinance me?
If your credit is very poor or your car is worth much less than you owe, refinancing may not be an option. In that case, focus on paying down the loan as fast as you can and building your credit score. Once your score improves or you have paid down the loan enough to have positive equity, refinancing becomes possible.