When you have bad credit, you may be able to get a car loan, but the rates and terms probably won’t be quite the deal you hoped for. Often, credit-challenged consumers find that they're only able to qualify for auto financing with high interest rates and/or short loan terms. This may not be ideal, but depending on how you pay on your loan, you may be able to qualify for something better after some time has passed by refinancing.
What Is Refinancing?
When you refinance, you're replacing your existing loan with one that has better terms. Refinancing is typically done with a different lender, but you should check with your current one first to see if they can help you.
The only reason you should refinance a car loan is to lower your monthly payment. This can be done in one of two ways: by qualifying for a lower interest rate, or by extending the loan term.
The better option, if it's available to you, is to lower your interest rate. This way, you save in interest charges over the loan term, saving you money monthly and overall.
Extending your loan term can help you lower the payment each month, but it should be done with caution. If you aren't able to get a lower interest rate at the same time, you actually increase the overall cost of the loan, even though you get a lower monthly payment.
Do You Qualify for Better Loan Terms?
In order to refinance an auto loan, you typically need to have good credit. However, if you originally took out a bad credit car loan, you may be able refinance as long as your credit score has improved.
Also, your loan and vehicle have to meet the lender qualifications in order for refinancing to be an option. Whether you're going with your current lender or a new one, keep these refinancing requirements in mind:
- Your loan must be current. If you're behind on any loan payments, don't expect refinancing to help you catch up. Your loan has to be current before you can qualify. If you're not current, make sure to contact your lender to see if they can help before you default and are faced with repossession.
- There has to be equity in your vehicle. If you owe more on your loan than the car is worth, you can't refinance. Vehicle value is important to lenders in order for refinancing to happen, because the car is the collateral in an auto loan.
- The vehicle must meet lender age and mileage restriction. All lenders have their own limitations on the cars they can refinance, so you need to check the allowances a lender uses up front.
- Loan amount has to be acceptable to the lender. The loan amount has to fall within lender guidelines, which vary by lender.
Don't Qualify for Refinancing?
If you're unable to qualify for refinancing but still need a better deal in order to keep up with an auto loan, trading in your vehicle may be your best option. When you find you're no longer able to make the payment, you may need to get a more affordable car.
As a borrower with credit challenges, you may be surprised by what you're able to take on with the right lender. If your credit score didn't improve enough for refinancing, but is still higher than when you took out your current loan, you may qualify for a lower interest rate or longer loan term on a different car.
Not sure where to start looking for the lender or the vehicle you need? The Car Connection works with a coast-to-coast network of special finance dealerships that have lenders available to help people with unique credit situations.
Let us connect you to a dealer in your area so that you can find the auto loan and car solutions you're looking for. There's never any obligation, and the process is fast and free. Get started by filling out our auto loan request form today!