Refinancing a car loan with bad credit is possible, but you will pay more and have fewer lenders to choose from
Refinancing means taking out a new loan to pay off your current car loan. When your credit score is low, most traditional lenders (banks and credit unions) will either turn you down or offer you a much higher interest rate than someone with good credit would get. Some lenders do specialize in bad-credit refinancing, but they charge higher rates because they see you as riskier. The real question is whether refinancing saves you money despite the higher rate — and that depends on how much your current rate is, how much time is left on your loan, and what rate you can actually get.
Before you start calling lenders, understand that refinancing only makes sense if your new rate is lower than your current rate, even after you subtract any fees. If you only have a few months left on your loan, the fees alone might cost more than you would save. This guide walks you through where to look, what to expect, and how to figure out whether refinancing will actually put money back in your pocket.
Key Takeaways
- Bad-credit lenders exist, but their interest rates are typically 2 to 8 percentage points higher than rates for borrowers with good credit.
- Refinancing only makes sense if your new rate is lower than your current rate, even after accounting for any fees the new lender charges.
- Credit unions often have more flexible lending standards than banks and may offer better rates to members with lower credit scores.
- Your current loan balance, the remaining term, and how long you plan to keep the car all affect whether refinancing will actually save you money.
Why your credit score matters to lenders
Your credit score is a three-digit number that summarizes your history of borrowing and repaying money. It ranges from 300 to 850, and most lenders consider anything below 620 "bad credit." When you refinance, the new lender pulls your credit report and score to decide whether to lend to you and at what rate.
A low score tells a lender that you have missed payments, carried high balances, or had other problems in the past. They respond by charging you a higher interest rate — their way of being paid extra for taking on what they see as extra risk. This is why bad-credit refinancing rates are so much higher than standard rates. If you had a 4% rate with good credit, a bad-credit lender might offer you 10% or 12% instead.
When refinancing actually saves you money
Refinancing only makes financial sense if your new interest rate is lower than what you are currently paying. But you also need to subtract any fees the new lender charges — things like origination fees, process fees, or prepayment penalties from your current lender. Some lenders charge $200 to $500 in fees, which can wipe out your savings if the rate drop is small.
Use this rough math: multiply your monthly payment by the number of months left on your loan to find your total remaining cost. Then do the same for the new loan. If the new total is lower after subtracting fees, refinancing could help. But if you only have 12 months left on your current loan, refinancing probably is not worth the hassle and fees, even if the rate is lower. You want at least 24 to 36 months remaining on the loan for refinancing to make sense, and you should plan to keep the car for that entire period.
Where to look for bad-credit auto refinancing
Credit unions are often your best starting point. Many credit unions have membership requirements based on where you live or work, but some are open to anyone. Credit unions typically have more flexible lending standards than banks and may offer rates 1 to 3 percentage points lower than online bad-credit lenders. If you belong to a credit union, call and ask whether they refinance auto loans for members with lower credit scores.
Online lenders that specialize in bad credit are your next option. Companies like Elevate, LendingClub, and Upgrade advertise bad-credit auto refinancing, though their rates are higher than credit unions. You can get a rate quote from several lenders without hurting your credit score if you do it within 14 days — the credit bureaus count multiple inquiries as a single search when they are close together.
Traditional banks (Wells Fargo, Chase, Bank of America) rarely refinance auto loans for borrowers with bad credit, so explore there usually wastes time. Some buy-here-pay-here dealerships offer in-house financing, but their rates are often the highest of all and come with strict terms like GPS tracking or starter interrupt devices on the car.
What lenders will ask for
When you explore to refinance, be ready to provide proof of income (recent pay stubs or tax returns), your current loan documents, and permission for the lender to pull your credit report. The lender will want to know the vehicle's current value, which you can find on Kelley Blue Book or NADA Guides. They will also verify that you own the car and that there are no liens against it besides the current loan.
Some lenders require the car to pass an inspection or have it appraised in person. This is more common with bad-credit lenders because they want to make sure the car is worth enough to cover the loan if you stop paying. The inspection usually costs $50 to $150 and is done by a third party, not the lender. Ask the lender upfront whether an inspection is required and who pays for it before you move forward with the process.
How to improve your chances of approval
If you have been turned down by lenders, there are a few things that can help. First, wait a few months if you recently had a major negative event like a missed payment or collection account. Your credit score will improve slightly just with time, and lenders see recent problems as riskier than older ones.
Second, add a co-signer if you have a family member or friend with better credit who is willing to sign the loan with you. Their credit score will be used alongside yours, and if they have good credit, it can lower your rate. But be clear with them: if you miss a payment, the lender will pursue them for the money, and the missed payment will show up on their credit report too.
Third, pay down other debts before you explore. If you have credit card balances, paying them down lowers your debt-to-income ratio, which is how much of your monthly income goes to debt payments. Lenders see a lower ratio as a sign you can handle another loan. Even paying down $1,000 or $2,000 in credit card debt can make a difference in whether you are approved and what rate you receive.
What happens after you are approved
Once you are approved, the new lender will contact your current lender and pay off the remaining balance on your old loan. This usually takes 7 to 10 business days. During that time, you still owe your original lender, so keep making payments on your current loan unless the new lender tells you to stop.
After the payoff is complete, you will start making payments to the new lender instead. Your car title will be transferred to the new lender's name (they hold it as collateral until you pay off the loan). You will receive new loan documents in the mail with your new payment amount, due date, and interest rate. Your first payment to the new lender is typically due 30 to 45 days after the old loan is paid off.
Frequently Asked Questions
Will refinancing hurt my credit score?
Yes, but only temporarily. When a lender pulls your credit report, it creates a "hard inquiry" that lowers your score by a few points. The impact fades after a few months. However, refinancing also closes your old loan and opens a new one, which can lower your score in the short term. Over time, if you make on-time payments on the new loan, your score will recover and improve.
Can I refinance if I am behind on my current car loan?
Most lenders will not refinance if you are currently behind on payments. You need to bring your account current first, which means paying all missed payments plus any late fees. After you are current, wait at least 30 to 60 days before explore to refinance, so lenders see that you have resumed making on-time payments.
What if I owe more than the car is worth?
This situation is called being "upside down" on your loan. Most lenders will not refinance if you owe more than the car's market value because they have no collateral to fall back on if you stop paying. Some credit unions or specialized lenders may refinance an upside-down loan, but they will charge a higher rate and may require you to pay the difference upfront.
How long does the refinancing process take?
From process to approval usually takes 1 to 3 business days if you provide all documents quickly. The payoff of your old loan takes another 7 to 10 business days. You should see your first payment to the new lender due 30 to 45 days after approval, depending on the lender's policies.
Can I refinance with the same lender I borrowed from?
Yes, and it is sometimes easier because they already have your information and payment history. Call your current lender and ask if they offer rate reductions or refinancing for existing customers. Some do, especially if your credit score has improved since you took out the original loan or if you have made all payments on time.