Refinancing a car loan with bad credit is possible, but you will pay more in interest and have fewer lenders willing to work with you than someone with good credit
When you refinance, you take out a new loan to pay off the old one. The new lender pays your current lender in full, and you start making payments to the new lender instead. With bad credit, most traditional banks will decline you, but credit unions, online lenders, and some captive finance companies (the lending arms of car manufacturers) will still consider your process. The catch: you will likely see a higher interest rate than you had before, a longer loan term to lower your monthly payment, or both.
The reason to refinance despite these drawbacks is straightforward: if your current interest rate is significantly higher than what you can get now, or if your financial situation has improved since you took out the original loan, refinancing can still save you money or free up monthly cash flow. The math matters more than your credit score.
Key Takeaways
- Credit unions typically offer the lowest rates for people with bad credit and often consider factors beyond your credit score, such as membership history or employment stability.
- Online lenders and subprime auto lenders will work with bad credit but charge higher interest rates, so compare offers from at least three lenders before accepting.
- You need to owe less than the car is worth (positive equity) to refinance easily; if you owe more, only a handful of lenders will refinance, and rates will be higher.
- Refinancing resets your loan term, so a lower monthly payment often means paying interest for longer — calculate total interest paid, not just the monthly amount.
- Your current lender will not block a refinance, but the new lender will verify the car's title and that you own it free and clear of other liens.
Where to look for refinancing with bad credit
Credit unions are usually your first stop. If you belong to one, ask whether they refinance auto loans for members with credit scores below 620. Many credit unions will refinance even if you are not currently a member — you can join first, sometimes with just a small deposit into a savings account. Credit unions tend to approve people with bad credit more often than banks because they weigh factors like how long you have been employed or whether you have other accounts with them.
Online lenders and subprime auto lenders are your second option. Companies like LendingClub, Upgrade, and specialized subprime lenders advertise refinancing for bad credit. These lenders move faster than banks or credit unions — you can often get a decision within 24 hours — but their interest rates are higher. Always get quotes from at least three lenders and compare the total interest you will pay over the life of the loan, not just the monthly payment.
Captive finance companies (the lending arms of Ford Credit, GM Financial, Toyota Financial Services, and others) sometimes refinance loans they did not originate. Call the manufacturer of your car and ask whether they refinance existing loans. Rates vary widely, but they occasionally beat online lenders for people with bad credit.
What lenders will ask for and what will disqualify you
Every lender will want proof that you own the car and that you owe less than it is worth. Bring your current loan paperwork, the car's title, and a recent payoff statement from your current lender. You will also need proof of income (a recent pay stub or tax return), a government ID, and proof of residence (a utility bill or lease agreement). Some lenders will ask for your employment history for the past two years.
The biggest disqualifier is negative equity — owing more than the car is worth. If you owe $15,000 on a car worth $12,000, most lenders will turn you down. A few subprime lenders will refinance negative equity, but they will roll the extra $3,000 into the new loan, meaning you will owe even more. This is rarely worth doing. To check your car's value, use Kelley Blue Book or NADA Guides and enter your car's exact year, make, model, mileage, and condition.
Recent missed payments or a recent repossession will also make refinancing much harder. If you missed a payment in the last 60 days, most lenders will decline. If you had a repossession in the last year, only a handful of subprime lenders will consider you, and rates will be very high.
How the refinancing process works step by step
Step 1: Get your payoff amount. Call your current lender or log into your account online and request a payoff statement. This is the exact amount needed to close the loan today, including any accrued interest. Write it down — this is the number the new lender will use.
Step 2: Get quotes from at least three lenders. explore online or by phone. You will provide your name, address, employment, income, the car's details (year, make, model, mileage, VIN), and your current loan information. Most lenders will give you a soft quote within minutes without a hard credit pull. A hard pull (which temporarily lowers your credit score) only happens if you move forward.
Step 3: Compare the offers. Look at the interest rate, the loan term (how many months), and the total interest you will pay. A lower monthly payment that stretches the loan from 48 months to 72 months might cost you thousands more in interest. Use an auto loan calculator to see the total cost of each offer.
Step 4: Accept an offer and provide documents. Once you choose a lender, they will ask for the documents listed above. They will also order a title search to confirm you own the car and that there are no other liens against it. This takes two to five business days.
Step 5: The new lender pays off the old one. Once everything is verified, the new lender sends a check directly to your current lender. Your old loan is closed, and you will receive a notice from your current lender confirming the payoff. You now owe the new lender instead.
Step 6: Start making payments to the new lender. Your first payment is usually due 30 to 45 days after the loan closes. The new lender will provide payment instructions and a new loan agreement showing your new interest rate, monthly payment, and payoff date.
When refinancing saves you money versus when it does not
Refinancing makes sense if your new interest rate is at least 1 to 2 percentage points lower than your current rate, or if you need to lower your monthly payment to cover an unexpected expense. If your current rate is 12% and you can refinance at 9%, the savings add up quickly. If your current rate is 8% and the best offer you get is 7.5%, the savings are small and may not be worth the time and paperwork.
Refinancing does not make sense if you are extending the loan term significantly. If you currently owe $10,000 at 14% over 36 months (about $330 per month), and a new lender offers you $10,000 at 11% over 60 months (about $212 per month), you save $118 per month but pay roughly $2,700 more in total interest. The math only works if you plan to pay the loan off early or if the rate drop is steep enough to offset the longer term.
Also consider the cost of refinancing. Some lenders charge origination fees (typically 1 to 3% of the loan amount), though many do not. Ask each lender whether there are any fees before you commit. Your current lender may charge a prepayment penalty, though this is rare for auto loans — check your loan agreement or call and ask.
How bad credit affects your refinancing rate
Your credit score is one factor lenders consider, but it is not the only one. A lender will also look at your payment history on the current car loan, your income, how long you have been employed, and whether you have other debts. If you have been making on-time payments on your current car loan for the past 12 months, some lenders will overlook an older bad credit event and offer you a better rate than your score alone would suggest.
The range of rates for bad credit is wide. Someone with a 550 credit score might see rates from 12% to 22% depending on the lender and the car. Someone with a 620 credit score might see rates from 8% to 15%. This is why comparing offers matters — the difference between lenders can be 4 to 6 percentage points, which translates to thousands of dollars over the life of the loan.
What happens to your current loan and your credit score
Your current lender will not try to stop you from refinancing — they get paid off in full and have no reason to object. However, the refinancing process will trigger a hard credit inquiry from the new lender, which temporarily lowers your credit score by 5 to 10 points. If you explore to multiple lenders within a short window (14 days is typical), the inquiries usually count as one inquiry for scoring purposes, so explore to all three lenders within a week or two.
Once the refinance closes, your old loan disappears from your credit report, and the new loan appears. Your credit score may dip slightly in the short term because you now have a new account with a zero payment history. Over time, as you make on-time payments on the new loan, your score will recover and eventually improve.
Frequently Asked Questions
Can I refinance if I am behind on my current car payment?
Most lenders will not refinance if you are currently behind. However, if you catch up on the missed payment first, you may be able to refinance after 30 to 60 days of on-time payments. A few subprime lenders will refinance if you are only one payment behind, but rates will be significantly higher.
What if my car has a lien from another creditor?
If you have a title loan or another lien against the car, the new lender will require that lien to be paid off as part of the refinance. The new lender will handle this — they will pay off both your current auto loan and any other liens, and you will owe only the new lender. Ask the new lender upfront whether they can handle multiple liens.
How long does the refinancing process take?
From process to funding typically takes 5 to 10 business days. Online lenders are usually faster (5 to 7 days), while credit unions may take 7 to 10 days. The title search and verification of ownership are the slowest steps. Once the new lender funds the loan, your old lender is paid off within 1 to 3 business days.
Will refinancing hurt my credit score?
Refinancing will lower your score by 5 to 10 points in the short term due to the hard credit inquiry and the new account. However, if you make on-time payments on the new loan, your score will recover within a few months and improve over time. The long-term benefit of a lower interest rate usually outweighs the temporary dip.
Can I refinance if I still owe money on a previous car loan?
Yes. Lenders care about your total debt and income, not whether you have one car loan or two. However, owing money on multiple vehicles increases your total debt, which may lower the rate you are offered or affect whether a lender will work with you at all. Provide information about all your debts when you explore.