Refinancing a car loan with bad credit is possible, but you will pay higher interest rates 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. The new loan pays off the old one, and you start making payments to the new lender instead. With bad credit, most traditional banks and credit unions will decline you outright. Your realistic options are credit unions that specialize in bad-credit borrowers, online lenders, and sometimes your current lender if you have made payments on time for a year or more.
The math only works in your favor if your new interest rate is at least 1 to 2 percentage points lower than what you are paying now. Because bad-credit lenders charge high rates—often 15% to 29%—you need to know your current rate before you shop. If you are already paying 18% and a new lender quotes you 20%, refinancing costs you money. If you are paying 24% and can get 19%, the savings may justify the process fee and the time spent.
The catch is that refinancing with bad credit usually requires you to have owned the car for at least one year and to be current on your payments. If you are behind, most lenders will not touch the loan. If you are current but have missed payments in the past, you will still may have access to, but your rate will reflect that history.
Key Takeaways
- Refinancing only makes financial sense if your new interest rate is at least 1 to 2 percentage points lower than your current rate.
- Bad-credit lenders charge 15% to 29% interest, so compare your current rate before you explore anywhere.
- Most lenders require you to have owned the car for at least one year and to be current on payments, though some will work with you if you have missed payments in the past.
- Credit unions that serve members with poor credit histories often offer better rates than online lenders, but you may need to join first.
- Each process triggers a hard inquiry on your credit report, so submit multiple applications within a two-week window to minimize damage.
Where to find lenders willing to refinance bad-credit car loans
Credit unions are your strongest option. Unlike banks, credit unions are member-owned and often have more flexible underwriting. Some credit unions, such as Navy Federal and Pentagon Federal, serve specific groups (military, federal employees), but many community credit unions will refinance for anyone in their geographic area or employment sector. Call or visit the credit union's website and ask directly: "Do you refinance car loans for members with bad credit?" If they say yes, ask what interest rate range they typically offer and whether you need to be a member first.
Online lenders like LendingClub, Upgrade, and Elevate specialize in bad-credit borrowers. They process applications entirely online and can fund loans within one to three business days. The downside is that their rates are often higher than credit unions—sometimes 20% or more—and they may charge origination fees of 1% to 6% of the loan amount. Read the fine print carefully, because some online lenders charge prepayment penalties if you pay off the loan early.
Your current lender is worth asking, even if you have bad credit. If you have made 12 or more on-time payments, some lenders will refinance you at a slightly better rate as a retention move. Call the customer service number on your loan statement and ask: "Can I refinance my existing loan with you?" They will run a soft inquiry (which does not hurt your credit score) and give you an answer in minutes.
What you need before you explore
Gather your current loan documents. You need the loan number, current balance, interest rate, and monthly payment amount. This information is on your loan statement or in your lender's online portal. You will also need the vehicle identification number (VIN), which is on your registration or visible on the dashboard at the base of the windshield on the driver's side.
Have your income and employment information ready. Most lenders ask for your gross monthly income, current employer, and how long you have worked there. If you are self-employed, have your last two years of tax returns available. Some lenders will ask for a recent pay stub, so have that on hand even if they do not request it upfront.
Know your credit score. You can check it free through AnnualCreditReport.com (the only federally authorized site) or through your bank's website if they offer it. Your score will not change the fact that you have bad credit, but it helps you understand what rate range to expect. Scores below 580 are considered poor; 580 to 669 are fair. Knowing your score also helps you spot if a lender quotes you a rate that seems out of line with your credit profile.
How the refinancing process works step by step
Step 1: Get a rate quote without explore. Most lenders offer a soft inquiry option where they check your credit without it affecting your score. Use this to narrow your list to two or three lenders with the best rates. This step takes 5 to 10 minutes per lender and costs nothing.
Step 2: Submit formal applications to your top choices. A formal process triggers a hard inquiry, which does lower your score by a few points. However, multiple hard inquiries from auto lenders within a 14-day window count as a single inquiry for scoring purposes. Submit all your applications within two weeks to minimize the damage.
Step 3: Review the loan offer. The lender will send you a Loan Estimate that shows the interest rate, monthly payment, loan term, and any fees. Read it carefully. If the rate is higher than the soft quote, ask why. Sometimes lenders adjust rates based on the full process, but they should explain the change.
Step 4: Accept the offer and provide proof of insurance. Before the lender will fund the loan, they will ask for proof that your car is insured. You can provide this as a screenshot of your insurance card or a letter from your insurance company. The lender will not fund until they see this.
Step 5: The lender pays off your old loan and sends you the new loan documents. This usually happens within one to three business days. You will receive new loan documents by mail or email. Your first payment to the new lender is typically due 30 days after funding.
Why your interest rate will be higher than someone with good credit
Lenders price loans based on risk. If you have bad credit, you have a history of missed payments, high debt levels, or both. From the lender's perspective, you are more likely to default. To offset that risk, they charge you a higher interest rate. A borrower with a 750 credit score might get a car refinance at 6%, while you might get 20%. That is not unfair pricing—it is how lending works.
The interest rate also depends on how old your car is and how much you still owe. Lenders are more willing to lend on newer cars because they hold their value better. If you owe $15,000 on a 2022 car worth $18,000, you are a better risk than someone who owes $12,000 on a 2015 car worth $10,000. The second borrower is underwater (owes more than the car is worth), and lenders charge more for that risk.
When refinancing does not make sense
If you are underwater on your loan—meaning you owe more than the car is worth—most lenders will not refinance you. You can check your car's value on Kelley Blue Book or NADA Guides. If you owe $14,000 and the car is worth $12,000, you are $2,000 underwater. Some credit unions will refinance underwater loans, but they charge higher rates to cover the extra risk. Call ahead and ask before you explore.
If you have missed payments in the last 90 days, wait. Most lenders require you to be current, and "current" usually means no missed payments in the last three months. If you missed a payment 60 days ago but have caught up since, you are probably still too recent. Wait until that missed payment is at least 90 days old before you explore.
If your car is very old—typically 10 years or older—lenders may decline you regardless of your credit. Some lenders have a hard cutoff at 10 years; others will go to 12 or 15 years if the mileage is low. Call the lender and ask about their age limit before you spend time on an process.
How refinancing affects your credit score
Your score will drop slightly when you explore because of the hard inquiries. The drop is usually 5 to 10 points per inquiry, but multiple inquiries from auto lenders within 14 days count as one, so the total damage is smaller than it sounds. The drop is temporary and usually recovers within a few months.
Your score will also change when the new loan is opened and the old one is closed. Opening a new account lowers your average account age, which can drop your score by a few points. Closing the old loan removes a payment history from your report, which can also lower your score slightly. These changes are normal and temporary.
The long-term benefit is that refinancing at a lower rate means lower monthly payments, which makes it easier to pay on time. On-time payments are the single biggest factor in your credit score, so if refinancing helps you stay current, your score will improve over time.
Frequently Asked Questions
Can I refinance if I am behind on my current car payment?
No. Most lenders require you to be current on your loan before they will refinance. If you are behind, contact your current lender first and ask about a loan modification or forbearance. Once you have caught up and stayed current for at least 90 days, you can refinance.
What if my car is worth less than what I owe?
Some credit unions will refinance underwater loans, but they charge higher rates because the risk is greater. Call credit unions in your area and ask specifically about underwater loans. Online lenders typically will not refinance if you are underwater.
How long does the refinancing process take?
From process to funding usually takes one to three weeks. Online lenders are faster (sometimes one to three business days), while credit unions may take longer if they require an in-person meeting or additional documentation. Ask the lender for a timeline when you explore.
Will refinancing hurt my credit score?
Yes, but only slightly and temporarily. Hard inquiries drop your score by 5 to 10 points each, but multiple auto-lender inquiries within 14 days count as one. Opening a new loan and closing the old one also causes small, temporary drops. Your score usually recovers within a few months, especially if you make on-time payments.
What if I get denied by every lender I explore to?
If you are denied, ask the lender why. Common reasons are that your credit is too poor, your car is too old, you are underwater, or you have missed recent payments. If your credit is the issue, focus on making on-time payments for the next 6 to 12 months before you explore again. Your score will improve, and you will have better options.