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 and credit unions will decline you, but credit unions that specialize in bad-credit lending, online lenders, and some captive finance companies (the lending arms of car manufacturers) will still consider your process. The catch: you will likely face higher interest rates than someone with good credit, and you may need to put down cash or have a co-signer.
The real question is whether refinancing makes financial sense for you right now. If your current loan has a very high interest rate and you have improved your credit score since you took it out, refinancing could save you money. If your credit has not improved, or if you are deep underwater on the loan (owing more than the car is worth), refinancing will probably not help and may make things worse.
Key Takeaways
- Bad-credit car refinancing is available through credit unions, online lenders, and some manufacturer finance companies, but interest rates will be higher than traditional lenders offer.
- You need to know your current loan balance, the car's current market value, and your credit score before you shop, because being underwater on the loan makes refinancing much harder.
- Refinancing typically takes one to two weeks from process to funding, and your current lender will be paid off automatically once the new loan closes.
- A co-signer or down payment can improve your chances of approval and lower your interest rate, but both come with real financial risk.
Check whether refinancing will actually save you money
Before you explore anywhere, do the math on your current loan. Pull your most recent statement and write down three numbers: your current interest rate, how many months are left on the loan, and your remaining balance. Then find out what your car is worth by checking Kelley Blue Book, NADA Guides, or Edmunds using your car's year, make, model, and mileage.
If you owe more than the car is worth, refinancing becomes very difficult. Most lenders will not refinance a loan where you are "underwater" because they have no collateral to recover if you stop paying. If you are underwater, you can sometimes still refinance through a credit union or online lender, but you will need a down payment to cover the gap, or you will need a co-signer.
If you are not underwater, use an online calculator to estimate what your new payment would be at different interest rates. A rough rule: if your current rate is more than 2 to 3 percentage points higher than what you might may have access to for, refinancing could save you money. But that savings only matters if you keep the car long enough to recoup any fees the new lender charges.
Understand what lenders will ask for and what your credit score means
When you explore to refinance, lenders will pull your credit report and look at your credit score. "Bad credit" typically means a score below 620, though some lenders work with scores as low as 500. Your score is not the only thing they look at — they also care about your payment history on the current car loan, your income, and how much you owe relative to what you earn.
Lenders will ask for proof of income (recent pay stubs or tax returns), proof of residence (a utility bill or lease), your driver's license, and details about your current loan and the car itself. Have these documents ready before you start shopping. You will also need to authorize a hard credit pull, which temporarily lowers your score by a few points but is necessary for any real offer.
One important note: multiple hard credit pulls in a short time (within 14 to 45 days, depending on the scoring model) usually count as a single inquiry, so you can shop around without taking a major hit. But if you space out your applications over months, each one will ding your score separately.
Where to look for bad-credit car refinancing
Credit unions often have the most flexible lending standards and lowest rates for bad-credit borrowers. If you belong to a credit union, start there — many have refinancing programs specifically for people with lower credit scores. If you do not belong to one, you may be able to join based on where you work, where you live, or a family connection. The Credit Union Locator tool on the CO-OP Network website can help you find one near you.
Online lenders like LendingClub, Upgrade, and Lightstream specialize in bad-credit lending and can give you a decision in hours rather than days. They typically charge higher rates than credit unions but are faster and require less paperwork. Read the fine print carefully — some charge prepayment penalties if you pay off the loan early, which defeats the purpose of refinancing.
Captive finance companies — the lending arms of car manufacturers like Ford Credit, GM Financial, or Toyota Financial Services — sometimes offer refinancing to their own customers. Call the number on your current loan statement and ask whether they offer refinancing for customers with lower credit scores. These companies know your payment history with them, which can work in your favor.
Avoid payday lenders, title loan companies, and any lender that guarantees approval or promises a specific rate before pulling your credit. These are red flags for predatory lending.
Decide whether a co-signer or down payment makes sense
If you are denied or offered a very high rate, a co-signer can improve your odds. A co-signer is someone with better credit who agrees to be legally responsible for the loan if you do not pay. They do not need to be present at signing, but they do need to authorize a credit pull and sign the promissory note. The co-signer's credit score and income will be factored into the decision, and the new loan will appear on their credit report.
Before you ask someone to co-sign, understand that you are asking them to take on real financial risk. If you miss a payment, the lender will pursue the co-signer for the full amount. This can damage their credit and strain your relationship. Only ask someone you trust completely, and only if you are confident you can make every payment on time.
A down payment is sometimes easier than finding a co-signer. Putting cash down reduces the amount you need to borrow, which lowers the lender's risk and can may have access to you for a better rate. If you are underwater on your current loan, a down payment can cover the gap. The trade-off is that you are using cash you might need for emergencies.
What happens after you are approved
Once you receive an offer and accept it, the new lender will order a title search and verification that you still own the car and that there are no liens against it other than the current loan. This usually takes three to five business days. During this time, keep making payments on your current loan — do not stop just because you have been approved for refinancing.
When everything clears, the new lender will fund the loan and send the money directly to your current lender to pay off the old loan in full. You will receive a new promissory note, new payment schedule, and new payment instructions. Your current lender will release the title once they receive payment, and the new lender will hold it as collateral for the new loan.
The entire process from process to funding typically takes one to two weeks. During that time, you may see both loans on your credit report, but you only owe one payment — to the new lender. Once the old loan is paid off, it will stop appearing on your report, though the account history will remain for seven years.
Watch out for common mistakes and red flags
Do not refinance if you are planning to sell or trade in the car within the next year or two. Refinancing resets your loan term, which means you will be paying interest on a longer timeline. If you sell the car before the loan is paid off, you may still owe money after the sale, especially if you are underwater.
Avoid lenders that charge origination fees, prepayment penalties, or require you to purchase add-on products like gap insurance or extended warranties. These costs eat into any savings you might get from a lower interest rate. Read the Loan Estimate document carefully — it will show all fees and the true annual percentage rate (APR).
Do not explore with multiple lenders in quick succession if you are not ready to move forward. Each process triggers a hard credit pull, and too many in a short time can signal to lenders that you are desperate for credit, which makes them less likely to approve you.
Frequently Asked Questions
Can I refinance a car I still owe money on?
Yes, that is the whole point of refinancing. The new lender pays off the old loan, and you start making payments to the new lender instead. If you owe more than the car is worth, you will need a down payment or co-signer to cover the gap.
Will refinancing hurt my credit score?
Yes, but usually only temporarily. The hard credit pull will lower your score by a few points, and closing the old loan will remove an active account from your report. Over time, on-time payments to the new lender will rebuild your score. The short-term dip is worth it if refinancing saves you money.
What if my current lender charges a prepayment penalty?
Some lenders charge a fee if you pay off the loan early. Check your loan documents or call your lender to ask. If there is a penalty, factor it into your savings calculation — the new loan needs to save you enough to cover the penalty and still come out ahead.
How long do I have to wait after being denied before I can explore again?
There is no official waiting period, but explore again when ready will not help. If you were denied, work on improving your credit score first — pay all bills on time for at least three to six months, pay down other debts, and correct any errors on your credit report. Then explore again.
Can I refinance if I am behind on my current car payments?
Most lenders will not refinance if you are currently behind. You need to bring your account current first, then wait at least a few months to show a pattern of on-time payments before explore to refinance.