What refinancing means and why credit matters
Refinancing a car loan means replacing your current loan with a new one, usually from a different lender. The new lender pays off what you still owe, and you make payments to them instead. People refinance to lower their monthly payment, reduce the interest rate, or shorten the loan term.
Your credit score affects whether a lender will refinance you and what interest rate they'll offer. A lower credit score signals to lenders that you've missed payments or carried high debt in the past, so they charge higher rates to offset their risk. This means refinancing with poor credit is possible, but you'll likely pay more in interest than someone with good credit would.
The real question isn't whether refinancing is available to you—it is—but whether the new loan actually saves you money after you factor in the higher rate and any fees the new lender charges.
Key Takeaways
- Refinancing with poor credit is possible through credit unions, online lenders, and some banks, though interest rates will be higher than for borrowers with good credit.
- You need to own the car outright or have positive equity (owe less than the car is worth) for most lenders to refinance you.
- Calculate the total cost of the new loan including the interest rate and any fees before you accept an offer, because a lower monthly payment doesn't always mean you save money overall.
- Your current lender may refinance you without a hard credit check, so calling them first can tell you whether refinancing makes sense before you explore elsewhere.
Where to look for refinancing with poor credit
Credit unions often have the most flexible lending standards for people with lower credit scores. If you belong to a credit union, call and ask whether they refinance car loans and what their rate range is for your credit profile. Credit unions are member-owned, so they sometimes offer better rates than banks because they're not trying to maximize profit.
Online lenders and subprime auto lenders (lenders who specialize in loans for people with poor credit) will also refinance you. LendingClub, Upgrade, and Elevate are examples, though rates and terms vary widely. Online lenders typically give you a rate estimate without a hard credit check first, so you can compare offers without damaging your score.
Traditional banks will refinance you if your credit has improved since you took out the original loan, but they're usually stricter about credit scores than credit unions or online lenders. Call your current lender first—many will refinance existing customers with a soft credit check, which doesn't lower your score.
What lenders need from you to refinance
You'll need to prove you own the car or have equity in it. This means the loan balance must be less than or equal to what the car is worth. Lenders use the car's value as collateral, so if you owe $12,000 on a car worth $10,000, most lenders won't refinance you because they'd lose money if you stopped paying and they had to sell the car.
Bring your current loan documents, proof of insurance, and your vehicle registration or title. The lender will order a vehicle history report (usually free to them) to confirm the car's condition and value. You'll also need proof of income—recent pay stubs, tax returns, or bank statements—so the lender can verify you can afford the new payment.
Some lenders will ask for your Social Security number and permission to pull your credit report. This is a hard inquiry, which temporarily lowers your score by a few points. If you're shopping around, try to submit all applications within two weeks; credit bureaus treat multiple inquiries for the same type of loan as a single inquiry if they happen close together.
How to know if refinancing actually saves you money
A lower monthly payment sounds good, but it can hide a longer loan term or higher total interest. Use a refinance calculator (available free on most lender websites) to compare the total amount you'll pay under your current loan versus the new loan.
Here's what to calculate: Take your current loan balance, multiply it by your current interest rate and remaining months, and add any fees. Then do the same for the new loan offer. The difference tells you whether you actually save money. For example, if you have 36 months left on your current loan at 12% interest, and a new lender offers 48 months at 10%, the lower rate might be offset by the extra year of payments.
Also factor in any fees the new lender charges. Some charge an origination fee (usually 1–5% of the loan amount), a title transfer fee, or a prepayment penalty from your current lender. These add to your costs upfront. A lender might quote you a 9% rate that sounds good until you realize there's a $500 origination fee built in.
The impact on your credit score
Refinancing will cause a small, temporary drop in your credit score when the lender pulls your credit report. This hard inquiry typically lowers your score by 5–10 points and falls off your report after 12 months. The impact is minor compared to missing a payment.
Once the new loan is open, your score may dip slightly again because you now have a new account with a short history. But over time, making on-time payments on the new loan will help your score recover and eventually improve, especially if you're paying down the balance.
Closing your old loan after refinancing won't hurt your score, but it does reduce the total credit available to you. If you have other debts, this can slightly raise your credit utilization ratio (the amount you owe divided by your total available credit). The effect is usually small, but it's worth knowing.
When refinancing doesn't make sense
If you're deep underwater on your loan (you owe significantly more than the car is worth), refinancing won't be an option with most lenders. Some credit unions and specialized lenders will refinance negative equity, but they charge much higher rates to cover the risk, so you may end up paying more overall.
If your car is very old or has high mileage, lenders may refuse to refinance regardless of your credit score. Most lenders won't refinance cars older than 10 years or with more than 150,000 miles, because the car's value drops quickly and the risk of breakdown increases.
If you're only a few months into your current loan, refinancing probably won't save you money because most of your early payments go toward interest anyway. The math usually works better if you've been paying for at least a year and have at least two years left on the loan.
Steps to take before you explore
Check your credit report for errors before you explore anywhere. You can get a free copy from AnnualCreditReport.com (the only official site for free reports). Dispute any mistakes with the credit bureau; correcting errors can raise your score before you explore.
Get your car's current value from Kelley Blue Book or NADA Guides. Use the trade-in value, not the retail value, because that's closer to what a lender will use. Knowing your equity position tells you whether refinancing is even possible.
Call your current lender and ask what your payoff amount is (the exact amount needed to close the loan today). This is different from your balance because it includes any accrued interest. Then gather your recent pay stubs, tax returns, and proof of insurance. Having these ready speeds up the process process.
Frequently Asked Questions
Can I refinance if I'm behind on my current car payment?
Most lenders won't refinance you if you're currently behind. You'll need to bring your account current first, which means paying the missed amount plus any late fees. After you've caught up and made a few on-time payments, you'll be in a better position to refinance.
What's the difference between refinancing and a loan modification?
Refinancing replaces your loan with a new one from a different lender. A loan modification changes the terms of your existing loan with your current lender—lower rate, longer term, or both. Modifications don't require a credit check and don't create a new account, so they're faster. Ask your current lender if they offer modifications before you shop for refinancing.
Will refinancing hurt my credit score permanently?
No. The hard inquiry lowers your score temporarily, but the effect fades within a few months. Making on-time payments on the new loan will help your score recover and improve over time. Missing payments, on the other hand, damages your score for years.
What if I have a co-signer on my current loan?
You can refinance without the co-signer if your credit has improved enough that the new lender will approve you alone. If not, you'll need the co-signer to explore with you again. Some lenders allow you to remove a co-signer after you've made a certain number of on-time payments, so ask about that option.
How long does refinancing take?
Most lenders give you a decision within a few days to a week. Once you're approved, the lender pays off your old loan and sends you new loan documents to sign. The whole process typically takes one to two weeks from process to funding, though online lenders can sometimes move faster.