What auto refinancing means and why bad credit makes it harder
Auto refinancing means replacing your current car loan with a new one from a different lender. The new loan pays off the old one, and you start making payments to the new lender instead. People refinance to lower their monthly payment, reduce the interest rate, or shorten the loan term.
When you have bad credit — typically a score below 620 — lenders see you as higher risk. They charge higher interest rates to offset that risk, which means refinancing may not save you money the way it would for someone with good credit. Some lenders will not refinance bad-credit borrowers at all. The ones who will often require that you have owned the car for at least six months and owe less than it is worth.
The real question is whether refinancing makes financial sense for your situation. If you are deep underwater on your loan (owing much more than the car is worth), most lenders will decline. If your current rate is already very high, the savings may be small. But if you have made on-time payments for several months since taking out the original loan, your credit may have improved enough that a new lender will offer you a better rate.
Key Takeaways
- Bad-credit auto refinancing is available from credit unions, online lenders, and some banks, but interest rates will be higher than for borrowers with good credit.
- You must have owned the car for at least six months, owe less than it is worth, and have made recent on-time payments for most lenders to consider your process.
- The refinance saves money only if the new interest rate is meaningfully lower than your current rate, which depends on how much your credit has improved since you took out the original loan.
- Credit unions often offer the lowest rates for bad-credit borrowers and may have more flexible requirements than banks or online lenders.
- You will need your current loan documents, proof of income, and the vehicle's current value before you contact a lender.
Where to look for bad-credit auto refinancing
Credit unions are usually the best starting point. They tend to offer lower rates than online lenders and banks for borrowers with bad credit, and they often have more flexible rules about how much you can owe on the car. You do not need to be a member to ask — many credit unions will let you join if you live or work in their service area, or if a family member is already a member. Call the credit union directly and ask whether they refinance cars for members with credit scores in your range.
Online lenders like LendingClub, Upgrade, and Elevate also refinance bad-credit auto loans. They typically give you a rate quote within minutes without a hard credit pull, so you can compare offers from multiple lenders without damaging your credit score. The tradeoff is that their rates are usually higher than credit unions, but the process is faster and you can do it from home.
Banks refinance auto loans, but most have stricter credit requirements and will not work with borrowers below a certain score. It is worth calling your own bank to ask, since they may offer better terms to existing customers, but do not expect them to be your best option if your credit is poor.
What lenders require before they will consider you
Most lenders have a minimum ownership period: you must have owned the car for at least six months, and some require a full year. This rule exists because lenders want to see that you are committed to keeping the car and that you have made several on-time payments on the original loan.
You also cannot owe significantly more than the car is worth. If you are underwater — meaning you owe $15,000 on a car worth $12,000 — most lenders will decline. Some will refinance up to 125 percent of the car's value, but that is uncommon for bad-credit borrowers. You can check your car's value on Kelley Blue Book or NADA Guides using the vehicle identification number (VIN) and mileage.
Lenders will want to see that your recent payment history is clean. If you have missed payments in the last six months, refinancing will be very difficult. If you have made all payments on time for six months or longer, that works in your favor and may mean a slightly better rate than if you had just started making on-time payments.
You will need proof of income — usually recent pay stubs or tax returns — and a valid driver's license. Have your current loan documents ready so the lender can see the exact terms and payoff amount.
How to calculate whether refinancing actually saves you money
The math is straightforward but straightforward to get wrong. You need three numbers: your current interest rate, the new interest rate the lender is offering, and how much you still owe on the car.
Use an auto loan calculator (available free on most lender websites) to compare your current monthly payment against the new one. If the new payment is lower, calculate how much you save over the life of the loan. Then subtract any refinancing fees — some lenders charge $0, others charge $100 to $300. If the total savings over the loan term is less than the fee, refinancing does not make financial sense.
Example: You owe $10,000 at 18 percent interest with 48 months left. Your current payment is about $280 per month. A credit union offers to refinance at 14 percent for 48 months, which would be about $250 per month. That is $30 per month saved, or $1,440 over the remaining loan term. If the refinance fee is $200, your net savings is $1,240 — worth doing. But if a lender charges $400 and saves you only $25 per month, the fee eats most of the benefit.
The refinancing process from start to finish
Contact three to five lenders and ask for a rate quote. Most online lenders and credit unions will give you a preliminary quote without a hard credit pull, which means it does not affect your credit score. This is called a soft inquiry. Compare the rates and monthly payments side by side.
Once you have chosen a lender, you will submit a formal process. This triggers a hard credit pull, which does lower your score slightly — usually by a few points. The lender will order a vehicle valuation to confirm the car is worth what you say it is. This takes a few days.
If the lender approves you, they will send you loan documents to sign. Read them carefully and confirm the interest rate, monthly payment, and loan term match what was quoted. Once you sign, the lender pays off your old loan directly. You will receive a payoff confirmation from your original lender within a few days, and your old loan is closed.
Your first payment to the new lender is usually due 30 to 45 days after the loan closes. During that time, make sure your old lender receives the payoff and releases the lien on the title. This can take two to three weeks, so do not be alarmed if you do not see it happen when ready.
Common reasons bad-credit refinancing gets denied
The most common reason is being underwater on the loan. If you owe more than the car is worth, lenders will not take on that risk. The only way around this is to make a large down payment from your own money to bring the loan-to-value ratio below 100 percent, but that defeats the purpose of refinancing.
Recent missed or late payments are another major reason. If you missed a payment in the last six months, most lenders will decline. If you are currently behind on your loan, you must catch up before explore to refinance.
Owning the car for less than six months will disqualify you at most lenders. If you are in this situation, wait and reapply once you hit the six-month mark. Your credit may also improve during that time, which could mean a better rate.
Some lenders will decline if the car is very old (typically over 10 years) or has very high mileage (over 150,000 miles). They worry the car will break down and you will stop paying. If this is your situation, ask the lender directly whether age and mileage are factors before you explore.
Alternatives if refinancing is not an option
If you cannot refinance, you have other ways to reduce your car payment. The simplest is to make extra payments toward principal whenever you can. Even an extra $25 per month reduces the total interest you pay and shortens the loan term. This costs nothing and requires no approval.
If your current lender offers a loan modification, ask about it. Some lenders will extend your loan term (say, from 48 months to 60 months) to lower your monthly payment, though this means paying more interest overall. This is not ideal, but it may help if you are struggling with the current payment.
If your credit score has improved significantly since you took out the original loan, wait a few more months and explore to refinance again. Credit scores can move 20 to 50 points in a few months if you pay all bills on time and keep credit card balances low.
Frequently Asked Questions
Will refinancing hurt my credit score?
Yes, but only temporarily. The hard credit pull when you explore lowers your score by a few points. The new loan also lowers your average account age, which can drop your score by 5 to 10 points. However, if the new loan has a lower interest rate and you make on-time payments, your score will recover and improve within a few months.
Can I refinance if I still owe money on my current loan?
Yes, that is the whole point of refinancing. The new lender pays off the old loan in full, and you owe only the new lender. You cannot refinance if you owe more than the car is worth, but as long as you are not deeply underwater, refinancing is possible.
How long does the refinancing process take?
From process to closing usually takes 5 to 10 business days. The vehicle valuation takes 2 to 3 days, and document signing and funding take another 2 to 5 days. Your old loan is paid off within a few days of that, though the title transfer can take 2 to 3 weeks.
What if my car is worth less than I owe on it?
Most lenders will not refinance if you are underwater. Your options are to make a large down payment from your own savings to bring the loan-to-value ratio below 100 percent, or to wait and make extra payments until you owe less than the car is worth. Some credit unions are more flexible on this, so it is worth asking.
Do I need to switch insurance companies when I refinance?
No. Your auto insurance is separate from your loan. The new lender will require proof of insurance, but you can keep your current policy. However, the new lender's name will be added to your policy as a lienholder, which your insurance company will handle automatically once you provide them with the new loan documents.