If you’ve had your car loan for some time now and you’re considering refinancing for a better loan term or interest rate, where should you go, and how does the process work? You could use the same lender, but you should see what else is out there, too. To understand how refinancing works and where to look for a new loan, continue reading.
How to Qualify to Refinance a Bad Credit Car Loan
In order to qualify for refinancing, a few things should have happened:
First, you need to have good credit, or your credit score has to have improved since taking out the initial loan. Lenders generally don’t allow you to refinance an auto loan immediately, and want to see that you’ve made on-time payments on your loan.
Second, you need to be current with your loan payments. If you’re behind, a lender isn’t going to refinance you, period.
Third, your car needs to qualify. There are specific vehicle requirements set by each lender, and they don’t refinance cars that are too old, have too many miles, or with a branded title.
Finally, you need to make sure your vehicle has equity – meaning it’s worth more than what you owe on the loan. Lenders typically won’t refinance a car unless its book value is equal to or more than the loan balance. The only way to eliminate negative equity is to pay the difference up front. If that’s not possible, you probably have to wait until you have equity.
Where to Go to Refinance Your Bad Credit Auto Loan
As for the lender you should refinance with, it depends. You could work apply for refinancing with your existing lender, but we recommend that you shop around to see what other lenders can offer.
You should research several different banks and lending institutions. Check out their requirements and apply with a few different ones. This allows you to view and compare several different refinancing offers.
Best of all, this process doesn't tank your credit score. When you rate shop for the same type of credit in a short amount of time (typically 14 days), all hard inquiries made only count against your credit score as one single hard inquiry. This gives you some time to rate shop and make a decision.
What if My Credit Score Didn’t Improve Much?
If some time has passed but your credit score didn’t increase as much as you hoped it would, can you still refinance? In some cases, it’s possible that a lender might be willing to let you refinance an auto loan if your credit is still poor.
This isn’t something you should count on, but if you’re struggling to keep up with the monthly payment, your lender may help you out by allowing you to sign a new loan contract with the same interest rate and extend your current loan term.
When you extend a loan term, you lower the monthly payment. If you don’t lower the interest rate, however, you end up paying more in interest charges in the long run.
If your lender offers this option, signing a new loan could be a good short-term fix if you need a lower payment. Make sure you talk to your lender about all of this – if you never mention the fact that you’re struggling, you could be faced with repossession if you miss a payment.
The Bottom Line
It can take some time before you can get approved to refinance your bad credit car loan. As long as you keep up with the monthly payments and take steps toward improving your credit score, you can make it happen in the near future!
While we can’t assist with refinancing, we can help you if you’re unsure about where to get an auto loan. At The Car Connection, we connect consumers to local dealerships that know how to help people in unique credit situations. Complete our car loan request form to get the process started today.