Refinancing a car loan with bad credit is possible, but you will pay more and have fewer lenders willing to work with you

Refinancing means taking out a new loan to pay off your existing car loan. With bad credit, most traditional lenders (banks and credit unions) will either decline you or offer rates only slightly better than what you have now. Subprime lenders and buy-here-pay-here dealerships will refinance bad-credit borrowers, but their rates typically run 15% to 29% APR or higher, and they often require a co-signer or a larger down payment than prime lenders do.

The math only works if your current rate is significantly higher than what you can get elsewhere, or if you need to lower your monthly payment by extending the loan term. Extending the term means you pay interest for longer, so you may end up paying more total interest even with a lower rate. Before you refinance, calculate whether the monthly savings justify the extra interest cost over the life of the loan.

Key Takeaways

  • Bad-credit refinancing is available through subprime lenders and some credit unions, but rates are typically 15% to 29% APR or higher.
  • Refinancing only makes financial sense if your new rate is at least 1% to 2% lower than your current rate, or if you need to lower your monthly payment urgently.
  • Extending your loan term lowers your monthly payment but increases the total interest you pay over the life of the loan.
  • Your credit score, the age and mileage of your vehicle, and your current loan balance all affect whether a lender will refinance you and what rate they offer.
  • Some credit unions offer better rates to members than subprime lenders do, even with bad credit, so checking your local credit union first can save you money.

When refinancing actually saves you money

Refinancing is worth considering only if one of two things is true: your new rate is substantially lower than your current rate, or you desperately need to lower your monthly payment right now. Most lenders will not refinance a bad-credit borrower unless the rate difference is at least 1% to 2% lower than what you currently pay. If your current rate is 22% and a subprime lender offers you 20%, that is a small enough difference that the refinancing fees and the time cost may outweigh the savings.

If you need to lower your monthly payment because you are struggling to make your current payment, refinancing can help—but only if you extend the loan term. Extending from 60 months to 72 months, for example, spreads your remaining balance over more months, which lowers each payment. However, you will pay interest on that balance for an extra 12 months. Calculate the total interest you will pay under both scenarios before you decide. Many lenders' websites have refinancing calculators that show you the total cost.

If you are current on your loan and your credit score has improved since you took it out, refinancing may be worth the effort. A score improvement of 50 to 100 points can sometimes unlock a rate 2% to 4% lower, which translates to real savings over the remaining loan term.

Lenders who refinance bad-credit car loans

Credit unions are often the cheapest option for bad-credit refinancing. Many credit unions will refinance members' car loans even with a credit score below 600, and their rates are typically 3% to 8% lower than subprime lenders charge. You do not have to have banked with the credit union for years; some allow you to join based on where you live or work, or through a membership organization. Call your local credit union and ask whether they refinance used cars and what credit score they require.

Subprime auto lenders specialize in borrowers with bad credit and will refinance you even if your score is very low. LendingClub, Upgrade, and Upstart are online subprime lenders that offer auto refinancing. Dealership-based subprime lenders (sometimes called "buy-here-pay-here" shops) also refinance, though they typically require you to refinance through them and may require a co-signer. Subprime rates are higher—usually 15% to 29% APR—but approval is faster and the income requirements are lower than at banks.

Banks rarely refinance bad-credit borrowers, but some regional banks and online banks have subprime auto divisions. If you have an existing relationship with a bank (a checking account, for example), call and ask whether they refinance used-car loans for customers with credit scores below 620. You may be declined, but asking costs nothing.

What lenders look at besides your credit score

Your credit score is not the only factor lenders consider. They also look at the age and mileage of your car, your current loan balance relative to the car's value, and how much of the loan you have already paid off. A car that is more than 10 years old or has more than 150,000 miles may be difficult or impossible to refinance, because the lender's collateral (the car itself) is worth very little. If you owe more than the car is worth—called being "underwater" on the loan—most lenders will decline you.

Lenders also check whether you are current on your existing loan. If you are behind on payments, most will not refinance you until you catch up. Some subprime lenders will refinance a borrower who is one or two payments behind, but they will roll those missed payments into the new loan, which increases your total debt.

Your income and employment history matter too. Lenders want to see that you have a steady income source and have been employed for at least a few months. If you are self-employed or have recently changed jobs, bring recent tax returns or pay stubs to show income stability.

The refinancing process step by step

Step 1: Gather your current loan information. You will need your loan account number, current balance, interest rate, and the remaining term (how many months are left). This information is on your loan statement or available through your lender's website or app.

Step 2: Get your car's value. Use Kelley Blue Book or NADA Guides to find the current market value of your car based on its make, model, year, mileage, and condition. Lenders use this value to decide whether to refinance you. If you owe more than the car is worth, most lenders will decline.

Step 3: Check your credit score. You can check your score for free through AnnualCreditReport.com or through your bank or credit card company. Knowing your score before you explore helps you target lenders who work with borrowers in your range and avoid wasting time on applications you will be declined for.

Step 4: Shop with multiple lenders. explore with at least three lenders—a credit union, an online subprime lender, and a bank or dealership lender. Each will pull your credit report, which temporarily lowers your score by a few points, but multiple inquiries within 14 to 45 days (depending on the credit bureau) count as a single inquiry for scoring purposes. This is called "rate shopping."

Step 5: Compare offers. When lenders give you a quote, compare not just the interest rate but the total cost: the monthly payment, the new loan term, and the total interest you will pay over the life of the loan. A lower rate with a longer term may cost you more in total interest than a slightly higher rate with a shorter term.

Step 6: Accept an offer and complete the paperwork. Once you choose a lender, you will sign a new promissory note and a security agreement (which gives the lender a lien on your car). The lender will pay off your old loan directly and send you the new loan documents. This usually takes 5 to 10 business days.

Costs and fees you will encounter

Refinancing is not free. Most lenders charge an origination fee (typically 1% to 8% of the loan amount), and some charge a title transfer fee or a documentation fee. These fees are usually rolled into your new loan balance, which means you pay interest on them. A $15,000 loan with a 5% origination fee means you are borrowing $15,750, and you will pay interest on that full amount.

Your old lender may also charge a prepayment penalty if you pay off the loan early. Check your original loan documents or call your lender to ask whether a prepayment penalty applies. Some states cap prepayment penalties at a certain percentage of the remaining balance; others ban them entirely. If a penalty applies, factor it into your refinancing calculation.

You will also need to update your car insurance to reflect the new lender's name on the title. This is a requirement of the loan agreement and does not cost extra, but it is a step you cannot skip.

Alternatives to refinancing when your credit is bad

If refinancing does not make financial sense or you are declined by all lenders, you have other options. Loan modification is an agreement with your current lender to change the terms of your existing loan—lower the interest rate, extend the term, or temporarily reduce the payment. This does not require a new credit pull and does not cost money to request. Call your lender's customer service line and ask whether they offer loan modification for borrowers in financial hardship.

Paying down the principal faster reduces the total interest you pay, even if you cannot refinance. If you have any extra money in a given month, put it toward the principal (not the interest). Ask your lender how to make a principal-only payment; some require you to specify this in writing to prevent the payment from being applied to interest first.

Improving your credit score before refinancing is another route. If you can wait 6 to 12 months, paying down other debts and making all payments on time will raise your score, which will unlock better refinancing rates later. This is slower but often cheaper than refinancing now at a subprime rate.

Frequently Asked Questions

Will refinancing hurt my credit score?

Yes, but temporarily. Each lender's credit inquiry lowers your score by a few points. Multiple inquiries within 14 to 45 days count as one inquiry, so shopping around with several lenders at once minimizes the damage. Your score typically recovers within a few months as you make on-time payments on the new loan.

Can I refinance if I am behind on payments?

Most traditional lenders will not refinance you if you are behind. Some subprime lenders will, but they will roll the missed payments into the new loan, increasing your total debt. It is better to catch up on your current loan first, then refinance.

What if my car is worth less than I owe?

Most lenders will decline you if you are underwater on your loan. Some credit unions and subprime lenders will refinance an underwater loan if you have good payment history, but they may require a co-signer or a larger down payment. Call lenders directly to ask; their websites do not always list this option.

How long does refinancing take?

From process to funding usually takes 5 to 10 business days. Online lenders are sometimes faster (3 to 5 days), while credit unions and banks may take longer. During this time, you are still responsible for your old loan payments.

Should I refinance if I only have a few months left on my loan?

Usually no. If you have fewer than 12 months remaining, the interest savings are small and may not justify the refinancing fees and the credit inquiry. Calculate the total savings before you explore.