Can I Refinance a Car Loan With Bad Credit?

There’s nothing quite as freeing as having your own vehicle at the ready to take you where you need to go. But as most drivers know, owning a car is expensive—so expensive that the vast majority of new cars (and well over a third of used cars) are purchased with financing, according to 2023 data from Statista.

It gets worse: The average monthly car payment in 2024 is $735. That’s more than a thrifty family might spend each month on groceries, per the USDA’s most recent estimates.

If you’re facing down a massive monthly payment, it makes sense that you may want to refinance your car loan—even if your credit score leaves something to be desired. But it’s not the right option for everyone. Here’s what to consider.

3 reasons to refinance a car loan—even if you have bad credit

We’ll be upfront with you (and you probably already know this): The better your credit, the better your chances of a favorable result when it comes to refinancing your auto loan. That said, there are a few reasons refinancing may still be a smart idea, even if your credit score could use some work.

1. You got your loan at the dealership.

Anyone who’s purchased a car at a dealership knows what a lengthy and, frankly, trying experience the process can be. After three or four hours of walking the lot, test driving, and waiting, waiting, waiting, chances are you’ll sign just about anything to drive your new vehicle away from there.

But if you got your new car conveniently financed on-site at the dealership, chances are the loan is a percent or two higher than you might have otherwise qualified for—a charge for their services that the friendly dealership broker may not have mentioned. Shopping around now could get you a better deal elsewhere.

2. You need a lower monthly payment.

Heads up: Refinancing could actually cost you more money over time. That’s because extending the life of a loan can mean paying more interest overall—even with lower rates.

For example: Say your initial loan was five years long, and you’ve been paying it for two. Refinance for another five-year loan and you’ll be paying the loan for seven years altogether.

On the other hand, if your financial situation has significantly changed for the worse—be it job loss, sudden illness, increase in living costs, or something else entirely—a lower monthly payment might be worth the additional overall expense

3. Your credit score or credit history have substantially improved.

If your credit is substantially better than it used to be, refinancing could yield better terms and save you money overall.

However, it’s a worthwhile exercise to look at the full amortization for both your existing and potential new loan, so you understand exactly how much you stand to save (or not). A good lender won’t hesitate to help you find those details.

How to refinance a car loan with bad credit

Serious about refinancing your car loan, even with bad credit? Here are the steps to take.

1. Understand your current loan

It’s not worth refinancing just for the sake of it; you have to figure out exactly what you stand to gain. Along with refinancing fees, you may also have to pay for a new state registration.

Start with understanding your current loan. Your latest statement may list a payoff quote, but keep in mind that that figure doesn’t include the interest you’ll continue to accrue over time. You can contact the lending institution and ask for the amortization schedule, or use an online loan calculator.

2. Shop around

With your newfound knowledge in your pocket, it’s time to go shopping—not for a new car this time, but for a new lender. Although market interest rates (and your personal financial demographics) greatly impact available terms, chances are some offer better deals.

These days, it’s relatively easy to pull multiple quotes online. You’ve probably heard that having multiple “hard” credit checks can ding your score, but multiple inquiries for the same loan type generally only counts as one, so long as they’re pulled within a certain amount of time—usually two weeks. So once you start shopping, be prepared to stick with it.

Be sure to ask your new prospective lenders for a full layout of what you’d stand to spend over the entire lifetime of the loan—along with the showier figures like interest rate and monthly payment. As mentioned above, a lower monthly payment might be worth paying more in the long run, but if you can minimize your overall spending, it’s usually smart to do so.

3. Only refinance for worthwhile deal

Now that you have an accurate, apples-to-apples comparison of the various loan options available to you, evaluate if refinancing is actually worth your time. (Be sure your lender also includes their fees in the total.)

If you decide to go forward with one of your refinancing offers, the lender will walk you through the steps to close on the deal. These days, most paperwork can be completed and submitted online.

Where to find lenders for refinancing a car loan with bad credit

What to do when you can’t refinance due to bad credit

Sometimes, you won’t qualify to refinance a loan even with low-score-friendly lenders. Fortunately, there are still some steps to take if this happens to you:

• Work on your credit score. By making on-time payments on your current auto loan—and any other debts you have—for six months or a year, you may improve your score enough for it to be worth trying again.
• Find ways to earn more. Increasing your cash flow can make it a lot easier to make your monthly auto loan payment—which, in turn, improves your credit history.
• Find a co-signer. Although not all lenders allow them, a co-signer can substantially strengthen your application, especially if their financial markers are better than your own. But be careful: Co-signers are every bit as responsible for the loan as you are, so if you make late payments or fail to pay the loan at all, you’re endangering your co-signer’s credit history as well as your own.

Risks of refinancing a car loan with bad credit

While refinancing your auto loan can sometimes lead to long-term savings (or at least short-term affordability), there are risks to refinancing when your credit score isn’t up to snuff. Namely, if you can’t get a substantially lower interest rate than your first loan, or if the new loan extends the overall repayment timeline, you risk paying much more in interest over time.

How to improve your credit before refinancing

Improving your credit before shopping around can make refinancing a loan more worthwhile in the long run. While there’s no shortcut to improving your credit score, the following can get you going in the right direction:

• Pay each of your loans on time, in full, every single month. Payment history, and on-time payments specifically, are heavily weighted when it comes to the credit calculus: Experian says it’s worth 35% of your score. So it may sound like old advice, but it’s still good advice to pay what you owe, when you owe it.
• Avoid taking out new lines of credit or loans. Along with adding hard inquiries to your report, which can slightly ding your score, new loans or lines of credit could substantially increase your revolving balance—which has a long-term negative effect. (Not to mention leaving you with less disposable money each month.)
• Review your credit report to check for errors. Sometimes, a low score isn’t your fault—if you’ve been the victim of credit fraud or otherwise spot an error on your report. But you have to look to find it, so make sure to review your free annual credit report each year (and especially before applying for a new loan).

When is it a bad idea to refinance a car loan with bad credit?

While there are some instances when refinancing a car loan with bad credit can be a useful tactic, there are others in which it probably isn’t a great money move.

Your credit is worse than when you took out your first loan.

If your credit score or history have worsened since you got your first auto loan, chances are the new loan you’d qualify for would have higher interest rates and a longer term. That means you’d stand to spend a lot more over the lifetime of the loan than if you stay with your original plan.

Market interest rates are higher.

While not the only factor, market interest rates do affect the rate you’ll qualify for. If those rates are higher than when you took out the loan, it might make more sense to wait a while before you go through the trouble of refinancing. (In today’s high-interest environment, they likely are.)

Alternatives to car loan refinancing

Even if car loan refinancing isn’t in the cards right now, there are still other options to consider.

Negotiate with your existing lender.

Although your loan may feel like it’s written in stone, you may be able to negotiate a lower monthly payment or a break from payment altogether (forbearance) with your lender. These measures are usually only available temporarily and may increase the amount of interest you pay over time. No matter what, ultimately you’re obligated to pay back the total as agreed in the original terms.

Trade in for a less expensive car.

A less-expensive car may mean a less-expensive loan, especially if you can use the value of your current vehicle as part of your down payment on something new—or at least new-to-you. Given the steep depreciation rate of most automobiles, you’ll probably want to choose a used vehicle to get the most out of this method.

Just be careful to weigh the potential repair costs of your next vehicle to the cost of the loan. If you invest in a true beater, you may find yourself spending thousands of dollars in maintenance to keep it running.

TIME Stamp: Refinancing could be within reach—but make sure it’s worth it

Refinance loan lenders look at more than just your credit score when it comes to qualifying you for a loan, so even if your score isn’t ship-shape, you might get the go ahead. Just make sure the new loan actually works for you in some way, whether it means saving money over the long run or making ends meet in the now.

Frequently asked questions (FAQs)

Can I refinance my car with a 500 credit score?

Most lenders don’t advertise their minimum credit score, and almost all of them look at more than just your score when qualifying you for a loan. Factors like your existing debt-to-income ratio (DTI), job history, and cash flow could help you qualify, even if you have poor credit. That said, the lower your credit score is, the higher your interest is likely to be—and a score of 500 may make it difficult to find a lender willing to qualify you without a cosigner.

What disqualifies you from refinancing a car?

The loan qualification process takes a variety of factors into account, including your credit history, personal debt, earnings, and information about the vehicle itself (such as its age and repair level). However, having an extremely low credit score, high revolving debt, little available cash, or a very-low–value car may make it more difficult to qualify for a refinancing loan.

How long does it take to refinance a car with bad credit?

The process of refinancing a car varies by lender and may take anywhere from just a few hours to two weeks or so. It depends in part on how the new lender pays the old lender. If it mails a paper check, it may take several business days for your old loan to read a $0 balance. As far as timing your refinance, many experts suggest waiting at least six months into your initial auto loan, which may help your credit score recover from any temporary dings it underwent during the initial lending process.