Refinancing a car 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 to lower your monthly payment or interest rate. With bad credit, most traditional banks will decline you, but credit unions, online lenders, and some subprime lenders do refinance bad-credit borrowers. The catch: you will typically see interest rates between 9% and 29%, depending on your credit score, the age of your car, and how much you still owe. You may also face origination fees, prepayment penalties on your old loan, or a requirement to have a co-signer.
The reason lenders hesitate is straightforward: your credit history suggests you have missed payments or defaulted before. A refinance lender is taking on that risk. They price it into the rate. Your job is to find which lenders will even consider you, understand what each one will actually charge, and decide whether the monthly savings are real or just spread over a longer loan term.
Key Takeaways
- Credit unions and online lenders are more likely to refinance bad-credit car loans than traditional banks, though rates will be higher than for borrowers with good credit.
- Your car's age and current value matter as much as your credit score—lenders often will not refinance vehicles older than 10 years or worth less than $5,000.
- A lower monthly payment does not always mean you are saving money if the new loan stretches over more years; calculate the total interest paid over the life of both loans to compare.
- Prepayment penalties on your current loan can erase some or all of the savings from refinancing, so check your loan documents before you explore.
- Adding a co-signer with better credit can lower your rate, but they become legally responsible for the debt if you do not pay.
Check your current loan for prepayment penalties
Before you contact any refinance lender, open your loan documents and search for "prepayment penalty" or "early payoff penalty." This is a fee the original lender charges if you pay off the loan early. Some loans have no penalty. Others charge a flat fee (often $200 to $500) or a percentage of the remaining balance (typically 1% to 5%).
If your penalty is high, it can wipe out most of the savings from refinancing. For example, if your monthly payment would drop by $50 but the prepayment penalty is $400, you need at least eight months of savings to break even. Call your current lender's customer service line and ask directly: "What is my prepayment penalty if I pay off this loan today?" They will give you a number. Write it down.
Understand what lenders will and will not refinance
Most lenders have hard rules about car age and value. A typical threshold is: the car must be 10 years old or newer and worth at least $5,000 to $7,000. If your car is older or worth less, many lenders will decline you outright. You can check your car's approximate value using Kelley Blue Book or NADA Guides—enter your vehicle's year, make, model, and mileage to get a range.
You also cannot owe more than the car is worth. If you owe $12,000 on a car worth $10,000, you are "underwater" on the loan, and most refinance lenders will not touch it. Some credit unions will, but they typically charge higher rates or require a co-signer. Before you explore anywhere, know your car's value and how much you still owe.
Where to look for bad-credit refinance lenders
Credit unions are often the most forgiving option. If you belong to one, ask whether they refinance used cars and what credit score they typically work with. Credit unions are member-owned nonprofits and often have more flexible underwriting than banks. You do not need perfect credit to join most credit unions—many are open to anyone in a geographic area or who works in a particular industry.
Online lenders
Subprime auto lenders
Your current lender may refinance you even with bad credit, since they already have a relationship with you and know your payment history. Call and ask if they offer rate reductions or loan modifications for existing customers. This is often faster and cheaper than refinancing elsewhere. Lenders will ask for the same basic information: your Social Security number, proof of income (recent pay stubs or tax returns), proof of residence (utility bill or lease), and details about your car (VIN, current mileage, and the name of your current lender). Have these ready before you start explore. Get quotes from at least three lenders. Most will give you a rate estimate without a hard credit pull, which means your credit score will not drop. Once you have three quotes, compare not just the interest rate but the total amount you will pay over the life of the loan. A lower rate over 72 months might cost more in total interest than a slightly higher rate over 48 months. Use an auto loan calculator to run the numbers. When you are ready to move forward with one lender, they will do a hard credit pull, which will temporarily lower your credit score by a few points. This is normal and expected. Multiple hard pulls within 14 days typically count as one inquiry, so do not space out your applications over weeks—do them within a short window. A co-signer is someone with better credit who agrees to be legally responsible for the loan if you do not pay. Adding a co-signer can lower your interest rate by 1% to 3 percentage points, which translates to real monthly savings. However, the co-signer's credit score will also be affected by the new loan, and if you miss payments, it damages their credit too. A co-signer should be someone you trust completely—a spouse, parent, or close family member. They should understand that they are on the hook for the full loan amount if you default. If you are considering a co-signer, ask the lender how much the rate would drop before you ask anyone. If the savings are only $10 to $15 per month, it may not be worth the risk to your relationship. This is the step most people skip, and it is the most important one. Before you sign the new loan, do this math: If your true savings is less than $500, refinancing may not be worth the hassle and the temporary credit score hit. If it is $500 or more, refinancing makes financial sense. Write down this number and keep it with your loan documents. Yes, but temporarily. A hard credit pull will lower your score by a few points. Your score will recover within a few months as you make on-time payments on the new loan. If you are planning to explore for a mortgage or another major loan soon, wait until after the refinance is complete and your score has recovered. Missed payments make refinancing harder but not impossible. Subprime lenders and some credit unions will still work with you, but your rate will be higher. The more recent the missed payment, the worse the rate. If you missed a payment more than a year ago and have been on time since, your odds improve significantly. Most mainstream lenders will decline you. Some credit unions and subprime lenders will refinance an underwater loan, but they typically charge 2% to 5% higher rates and may require a co-signer. It is worth asking, but do not expect a good rate. From process to funding usually takes 3 to 7 business days with online lenders and credit unions. Your current loan is paid off first, then the new lender funds the new loan. You will have a brief period (usually a few days) where you have no active loan—this is normal and does not affect your ability to drive the car. If you are declined, ask the lender why. Common reasons include: the car is too old, you owe too much relative to its value, or your credit score is below their minimum. If the car is the issue, you cannot fix that. If it is your credit score, you could wait 6 to 12 months, make all payments on time, and try again. In the meantime, focus on paying down other debts to improve your score.Gather documents and get rate quotes
Decide whether a co-signer makes sense
Calculate your actual savings before you sign
Frequently Asked Questions
Will refinancing hurt my credit score?
What if I have missed payments on my current loan?
Can I refinance if I still owe more than the car is worth?
How long does refinancing take?
What if I get denied for refinancing?