How to Refinance a Car Loan with Bad Credit

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Are you struggling to make your car loan payments? Do you want to switch to a loan that offers lower interest rates? Then, you might want to look into refinancing your car loan.

Refinancing a car loan is a step that could help you lower your monthly payments or negotiate better terms on a car loan.

However, refinancing rates depend on specific factors like your credit history and credit score. If your score isn’t up to par, you may be doubting if refinancing is a viable option for you. While your fears are well-founded, we’re here to show you how refinancing your car loan could still be possible despite having bad credit.

In this article, we’ve put together our top tips on how to go about refinancing a car loan with bad credit to help you achieve your financial goals. 

Let’s get started!

Can You Refinance Your Car Loan When You Have Bad Credit?

While refinancing your car loan with a bad credit score is possible, it could prove challenging if your credit has not improved since your initial car loan. As with lower credit scores, you’re likely to be charged higher interest rates. 

Nonetheless, if you’re still planning on refinancing your car loan with bad credit, you need to assess your current financial situation and explore any potential saving opportunities. For example, when repairing your vehicle, you could source budget-friendly car parts in the UK to reduce maintenance costs.

Furthermore, if car loan rates have reduced since your previous loan, you have a higher chance of finding one at a better interest rate. By checking historical data on new car loan average interest rates, you can get a general understanding of the current interest rate trends. 

Alternatively, if your refinancing goal is to get a lower monthly payment, you might need to extend your loan term. However, a longer term may increase the amount of interest you pay over the length of your loan.

To help you get started, let’s take a look at some steps that you can take to find bad credit loans specially designed for your exact needs.

1) Check Your Credit Reports and Credit Scores

Before applying for a refinance loan, you need to review your credit reports for incorrect information. Having inaccurate information on your credit report could negatively affect your chances of qualifying for a new loan. As such, if you find any inaccuracies, you need to dispute these errors as soon as possible.

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Furthermore, examining your credit and knowing your credit score also helps you set expectations before you start looking for loans. For example, if a previous bankruptcy is still present on your credit report, you’ll have to look into bad credit lenders that consider applicants with bankruptcy in their credit history.

2) Reach Out to Your Lender

Before looking at new lender options, you may need to first reach out to your current one. 

If you’ve been responsible and met all the loan terms and conditions, your credit score has improved or interest rates have gone down, your current lender could be willing to refinance your loan. However, not every lender is open to refinancing their loans. As such, you will need to first check to see if your current lender is an option. 

If they are open to a refinance, they will most likely do a hard pull on your credit report. To minimise the impact on your credit score, you need to compare loan offers quickly as it generally takes time for a hard enquiry to be reported.

3) Shop Around to Find the Best Option

If your lender is willing to refinance your loan, it’s still a good idea to shop around and compare other offers. By doing so, you can ensure that you’re receiving the best refinance loan for your needs and budget.

Additionally, you could also consider banks or credit unions you’re currently doing business with. However, online lenders may be a more favourable option as many cater to consumers with less-than-stellar credit scores.

After collecting a few quotes, you have to compare the annual percentage rate, loan terms and additional fees across offers. Consequently, you will be able to determine if refinancing is a sensible option for you.

4) Apply for a New Loan

Before submitting your loan application, you will need to collect all the documents your lender will need to speed up the review process. 

Some common requests include proof of income and residency alongside information about your current loan. You will also need to provide details about your car such as model, make and your vehicle’s identification number.

During the application process, ensure to fill the forms accurately to avoid any discrepancies that could lead to your application getting denied. The lender will then confirm all of the information that you’ve provided to ensure everything is in order.

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5) Finalise the Loan

After getting approved, review the loan documents to make sure the terms and conditions are correct and align with your needs. Moreover, you need to verify that it matches the terms exactly as discussed with the lender. 

Once you’ve finished reviewing the loan documents, you simply need to sign on the dotted lines to finalise the transaction. After this, the funds you’ve requested will either be sent directly to your current lender or you can use them to pay off the original loan.

Why Refinancing a Car with Bad Credit Isn’t Always Smart

Lenders always begin a new loan term whenever you refinance your car loan. In theory, this could lead to you getting more affordable monthly payments. However, unless your credit score has improved since you took out your original loan, you’re unlikely to receive a better interest rate.

Moreover, if you extend your total loan term, you could end up paying more throughout the loan as your lender will have more time to collect interest from you. If you really need to lower your monthly payments this is your best option. However, stretching out your loan term without lowering the interest rate could result in you paying way more than your car is worth.

Furthermore, ensure that you look into whether your current lender charges any prepayment penalties before refinancing your car loan. If the penalty is more than your savings, this could negate the benefits of a lower monthly payment. 

Despite all these possible setbacks, refinancing your car loan with bad credit could still be a viable option if you use the opportunity responsibly.

To Wrap Up

Identifying if refinancing your car loan is worth it comes down to a few deciding factors like your credit score, the current car loan interest rates as well as your budget.

If you’re committed to the idea of refinancing your loan and have bad credit, doing your homework regarding bad credit loans could seriously pay off. By reviewing your credit reports and disputing errors, talking to your current lender and browsing other options, you will be able to find a refinance loan that meets all your needs. 

In general, take time to evaluate your financial situation, loan options and total budget. By doing so, you can make an informed decision and move one step closer to a healthy financial future.