Refinancing with bad credit is possible, but you will pay more and have fewer lenders willing to work with you
Refinancing means replacing your current car loan with a new one, usually from a different lender. When your credit score is low, lenders see you as higher risk, so they charge higher interest rates and may require a larger down payment or a co-signer. You can still refinance — credit unions, some online lenders, and subprime auto lenders work with borrowers in this situation — but the math has to work in your favor. If your current interest rate is only slightly higher than what you would get with bad credit, refinancing costs more than it saves.
The main reason to refinance with bad credit is to lower your monthly payment by extending the loan term, or to escape a predatory lender who charged you an extremely high rate when you had no other options. Refinancing to a lower interest rate is harder when your credit is poor, because the rate improvement is usually small. Before you start, check your current loan documents for a prepayment penalty — some lenders charge a fee if you pay off the loan early, which can wipe out your savings.
Key Takeaways
- Refinancing with bad credit is possible through credit unions, online lenders, and subprime auto lenders, but interest rates will be higher than for borrowers with good credit.
- You need to own the car outright or have paid down enough of the loan that the car is worth more than you owe — lenders will not refinance an underwater loan.
- A prepayment penalty on your current loan can eliminate most or all of your savings, so check your loan documents before you explore anywhere.
- Adding a co-signer with better credit can lower your rate, but that person becomes legally responsible for the debt if you stop paying.
- The monthly payment savings must be large enough to cover the cost of refinancing, which includes an process fee and the time value of a longer loan term.
What lenders look at when you have bad credit
Bad credit typically means a score below 620, though definitions vary by lender. When your score is in this range, lenders focus on factors beyond the number itself. They want to know how recently you missed payments — a missed payment from two years ago is less concerning than one from two months ago. They also look at your debt-to-income ratio, which is your total monthly debt payments divided by your gross monthly income. If you are spending more than 50 percent of your income on debt, most lenders will decline you or offer only a high rate.
Your car's value and how much you still owe matter enormously. If you owe $15,000 on a car worth $12,000, you are underwater, and almost no lender will refinance you because they have no collateral if you default. If you owe $12,000 on a car worth $15,000, you have equity, and lenders are more willing to work with you. You can check your car's value using the National Automobile Dealers Association (NADA) Guides or Kelley Blue Book, both free online.
Credit unions versus online lenders versus subprime auto lenders
Credit unions typically offer the lowest rates for borrowers with bad credit, but you must be a member. Membership requirements vary — some are open to anyone in a geographic area, others require you to work for a specific employer or belong to an organization. If you are not already a member, joining takes a few days and usually costs nothing or a small one-time fee. Credit unions are more willing to look past a low credit score if you have a stable income and a reasonable debt-to-income ratio. Call your local credit union and ask if they refinance auto loans for members with credit scores below 620; if they do, ask what documents you need to bring.
Online lenders like LendingClub, Upgrade, and Lightstream advertise to borrowers with bad credit and can give you a rate quote in minutes without a hard credit inquiry. A hard inquiry temporarily lowers your score, so getting quotes from multiple lenders matters. Online lenders often charge origination fees of 1 to 8 percent of the loan amount, which is added to what you borrow. Read the fine print carefully — some online lenders are actually banks, and others are brokers who sell your process to multiple lenders, which can result in multiple hard inquiries.
Subprime auto lenders specialize in borrowers with bad credit and are sometimes called "bad credit auto lenders." They include companies like Westlake Services, Santander Consumer USA, and Hyundai Capital America. These lenders are more likely to approve you, but their interest rates are the highest of the three options — often 15 to 29 percent. They also charge higher fees and may require a larger down payment. Use them only if credit unions and online lenders have declined you.
How to calculate whether refinancing saves you money
Refinancing costs money upfront: process fees (usually $75 to $200), title transfer fees (varies by state, typically $50 to $300), and sometimes a loan origination fee (1 to 8 percent of the new loan amount). You also lose money by extending the loan term — if you refinance a 3-year loan into a 5-year loan, you pay interest for two extra years. To know whether refinancing is worth it, you need to compare your total cost under both scenarios.
Start by finding out what interest rate you would get from a lender. Most lenders will give you a rate quote without a hard inquiry if you provide your credit score, income, and the car's value. Write down the new interest rate and the loan term they offer. Then calculate your new monthly payment using an auto loan calculator (available free from Bankrate, NerdWallet, and most lender websites). Subtract your current monthly payment from the new one. If the new payment is lower, multiply the monthly savings by the number of months you plan to keep the car. Then subtract the total upfront costs and any prepayment penalty from that number. If the result is positive, refinancing saves you money.
Example: Your current loan has a $450 monthly payment and a $200 prepayment penalty. A new lender offers a rate that would give you a $380 monthly payment over 5 years instead of 3. Your monthly savings is $70. If you plan to keep the car for 3 more years (36 months), your total savings is $70 × 36 = $2,520. Subtract the prepayment penalty ($200) and refinancing fees ($150), and you net $2,170 in savings. If you plan to keep the car for only 1 more year, your savings is $70 × 12 = $840, minus $350 in costs, for a net savings of $490 — still worth it, but much smaller.
Adding a co-signer to improve your rate
A co-signer is someone with better credit who signs the loan alongside you and becomes legally responsible for the debt if you do not pay. Co-signers are usually family members or close friends. Adding a co-signer can lower your interest rate by 2 to 5 percentage points, which translates to real monthly savings. However, the co-signer's credit score will be affected by the new loan, and if you miss a payment, the lender will pursue the co-signer for the full amount owed.
Before asking someone to co-sign, be honest about the risk. Show them the loan documents and explain that they are responsible for the full debt if you cannot pay. Many people damage relationships by asking a family member to co-sign without fully explaining this. If the co-signer agrees, they will need to provide their Social Security number, income documentation, and permission for a hard credit inquiry. The lender will verify their income and check their credit before approving the loan.
State-specific rules and prepayment penalties
Prepayment penalties are legal in most states but not all. California, Iowa, and South Carolina prohibit them entirely on auto loans. In other states, lenders can charge a penalty if you pay off the loan early, typically 1 to 3 percent of the remaining balance or a flat fee. Some lenders charge a penalty only in the first year or two. Check your current loan documents under "Prepayment Penalty" or "Early Payoff Fee" — if you do not see it, call your lender and ask directly.
A few states cap the interest rate a lender can charge on auto refinance loans. South Dakota caps rates at 36 percent, and a handful of others have similar limits. If you live in one of these states and your current rate is above the cap, refinancing becomes much more attractive because the new rate will be lower by law. Your state's attorney general website or banking regulator can tell you whether your state has a rate cap.
What happens after you refinance
Once your new lender approves you, they will contact your current lender to find out the payoff amount — the exact sum needed to close the loan. This amount includes any remaining principal, accrued interest, and sometimes a payoff fee. Your new lender will pay off the old loan and issue you a new loan agreement. You will make payments to the new lender going forward. The title to your car may be held by the new lender until you pay off the loan, depending on your state's rules.
The entire process usually takes 5 to 10 business days from approval to funding. During this time, you should continue making payments to your current lender to avoid a missed payment. Once the new loan funds, your old lender will confirm the payoff and release the title. Keep all documents from both lenders for your records, especially the payoff confirmation from your old lender.
Frequently Asked Questions
Can I refinance if I still owe more than the car is worth?
No. Most lenders will not refinance an underwater loan because they have no collateral if you default. If you are underwater, you can wait until you have paid down the loan enough to have equity, or you can add cash to the refinance to cover the difference — but this defeats the purpose of lowering your payment.
How many times can I refinance the same car?
There is no legal limit, but lenders become more cautious after a refinance. If you refinance twice in two years, some lenders will see you as desperate and decline you. Space out refinances by at least 12 to 18 months if possible, and only refinance when the math clearly works in your favor.
Will refinancing hurt my credit score?
Yes, temporarily. The hard inquiry will lower your score by a few points, and opening a new loan account will lower it further. However, your score usually recovers within a few months as you make on-time payments to the new lender. The long-term benefit of a lower interest rate usually outweighs the short-term score dip.
What if my car has a loan from a buy-here-pay-here dealer?
Buy-here-pay-here lenders are extremely difficult to refinance away from because they often hold the title and use GPS tracking or starter interrupt devices. Call a credit union or online lender first to see if they will work with you. If they decline, you may need to pay off the buy-here-pay-here loan in full before refinancing elsewhere.
Can I refinance if I am behind on my current loan?
Most lenders will not refinance if you are currently 30 or more days behind. Bring your account current first, then wait at least 3 to 6 months before explore to refinance. The longer you wait after catching up, the better your chances of approval.