How to Refinance a Car Loan with Bad Credit
Yes! It is possible to refinance a car loan with bad credit. Many people have asked this question if they could refinance a car loan with bad credit.
Having bad credit doesn’t stop you from refinancing your car loan. However, not all lenders will agree to refinance a bad credit score.
Some lenders will accept to refinance your loan when you meet their requirements.
You must bear in mind that only a high credit score can qualify lower rate, that’s to say your rate will be higher when you refinance with bad credit.
Suppose rates have dropped generally after the last time you got your loan, it’s a good time for you to refinance, but you must have made payments for about 12 months for the last loan.
If your score is too bad to qualify for refinancing you may have to ask a friend or a family member to stand in for you as a co-signer.
How to refinance a car loan with bad credit
1. Review your credit reports and Scores
The first thing to do when you want to refinance a car loan with bad credit is to check your credit report and score.
This will enable you to know your stand and see if any mistake occurred and to quickly fix it because the error could affect your score and probably disqualify you from refinancing.
By reviewing your reports, you have an overview of what rate you may qualify for and the kind of lenders that may accept your scores to refinance a car loan with bad credit.
You may want to check on your credit report from one of the agencies on annualcreditreport.com for free.
2. Contact your lender
It is ideal to first contact your current lender, to know if they will agree to refinance your auto loan before checking elsewhere.
Although most lenders will not want to refinance their loans, there is no harm to check if yours will agree to this effect.
If there is no issue with your loan, your credit score has improved from when you got your auto loan and auto rates have equally decreased, sure they will be willing.
You will be on a better stand if your lender agrees to do a refi for you.
3. Shop around for bad credit lenders
As most lenders will not refinance a car loan with bad credit you can still find lenders that specialize in refinancing auto loans with bad credit and even bankruptcy.
Even when your lender agrees to refinance your auto loan, you should shop around and compare rates and terms and see if you can get a suitable rate better than what your current lender offers.
Check the lender’s minimum credit score to know whether you fall in, also do a pre-qualification check to see if the lender will allow you to pre-qualify with a soft credit check without affecting your score.
4. Apply for a new loan
When you are settled on which lender to go for quickly get all your documents ready and tender your application.
The document you will be submitting includes your current loan document employment verification, proof of income, vehicle mileage, make, auto model, and identification number.
It is expedient for you to get these documents ready within the first 14 days of application as this will require a hard credit inquiry due to a bad credit score.
Your score will drop but if you provide these documents on time, the pull will be insignificant.
The Requirement to Qualify for Refinancing
There are other requirements you must meet for lenders who refinance a car loan with bad credit. You may want to consider criteria before refinancing your auto loan.
1. Income Flow
Your income flow is a prerequisite for you to qualify for refinancing. They will want to know if you have a job currently and how consistent is your earning.
Your lender will want to know how much you receive every month and how you plan to pay back if you will be capable of meeting up with your monthly payment after you have received the loan.
2. Debt-to-income ratio (DTI)
Your lender will want to know other debts you pay in a month and sum them up to get the percentage difference when deducted from your monthly earning.
If your DTI ratio is less than 50% of your total monthly income when deducted, you stand a chance to qualify.
On the other hand, if your DTI is above 50% your request may not go through. If you earn $5,000 in a month and you pay $2,000 in debt in a month your DTI is 40%.
3. Loan-to-value ratio (LTV)
The loan-to-value ratio measures the value of your car to the loan amount you request. When your car value is higher than the loan amount you are requesting, your request is likely to go through. However, if your car value is lesser than the loan amount you want, your lender may not approve your request.
Reasons you should refinance a car loan with bad credit
1. Lower your rate
whenever there is a general drop in rate, with refinancing you can lower your rate and save more. Also, it is ideal to refinance when you find a lender that offers a lower rate than what you currently have or pays as a rate on your current loan.
You have to first do the math and see if it is worth it when you refinance a car loan with bad credit.
2. Improved credit score
If after many months of taking your last loan, you have been consistent with making payments as at when due, your credit score should have improved.
When you refinance with an improved credit score and a good payment history, you may likely get a better rate than what you currently have.
3. Lower your payment monthly
If you are having difficulty meeting up with payment and it has been up to 12 months since you got your loan. Refinancing your auto loan with a longer term and better rate could help reduce your monthly payment.
Although the difference may not be much when your credit score is poor. You may pay more on rate because of the increased term, but that’s better than missing payment.
4. Your car value has increased
Unlike a mortgage, cars depreciate faster, but often when there is a scarcity of the same car product you have, the price will increase. If the current value of your car is higher than the current amount you owe, refinancing your car loan will be a better option.
Factors affecting credit score
Some factors determine the growth or decrease of your credit score and they are in percentage.
1. Payment history: Your payment history is the major determinant of whether your credit score improves or decreases. It covers up to 35% of your credit score.
Whenever you miss payment consistently it affects your credit score drastically. So when you want to refinance a car loan with bad credit work on building a good credit score to improve your score.
2. Total debt: Having several debts to your credit card does not affect your credit score negatively, so long as you have enough money to pay off your debt. This makes up 30% of your credit score.
3. Length of credit history: Newer accounts are affected by credit pull, older accounts are preferable. If you have a new account while refinancing a car loan with bad credit, it will affect your credit score. The length of credit history covers over 15% of your credit score.
4. Credit mix: When you have a mix of accounts, such as a mortgage, personal loan, auto loan, and credit card, it will help improve your score. This covers up to 10% of the credit score.
5. New credit account: Opening a new account when you already have a poor credit score will adversely affect your credit score. It covers up to 10% of the credit score.
How to Improve Your Credit Score
Having known the factor that affects your credit score, you have to know how you can improve the scores.
- Maintaining consistency in your payment history will automatically improve your credit score.
- You can pay more than your stipulated monthly payment when you have more money, this will reduce your total debt over time and build a good credit history that will improve your score.
- If you spread your credits and be consistent with payments, your credit score will improve.
- As you plan on having multiple credits, you should space your loan application. Applying for another loan within a short time of getting approval for one will affect your credit score.
Alternative to refinancing auto loan
Suppose you lost your job and you have trouble meeting up with monthly payments. If you do not meet the requirements to refinance a car loan with bad credit you should consider trading your car.
However, if your current car value is higher than your debt, you can use the balance to refinance other loans or sort out a personal need.
Sum Up
When you refinance a loan with bad credit you may not get a good rate for your loan. It is advisable you plan ahead of time, and build a good credit history that will improve your credit score and help you qualify for low rates.
If there is a drop in auto rate do not hesitate to refinance as you will pay less monthly to help you maintain consistency in payment.
You may also want to read: How to Refinance Your Mortgage
