Refinancing Your Auto Loan with Bad Credit: A Practical Guide

Mikko Rocco
Published Jan 10, 2025


If you're considering refinancing your auto loan but worry about your credit score, there's good news. 

Even with a FICO score below 630, options are available to help you secure better loan terms.

Why Consider Refinancing?

1. High-Interest Rates from Dealerships: Often, dealerships offer loans with high-interest rates to consumers with bad credit. If you were locked into such a rate, refinancing could potentially lower your interest costs.

2. Improved Credit Scores: Regular, on-time car payments can improve your credit score. If your financial behavior has boosted your score, you might now qualify for loans with more favorable terms.

3. Lower Monthly Payments: If your current car payments are higher than you can comfortably handle, extending your loan term through refinancing might lower these payments. However, this could mean paying more interest over time.

4. Market Conditions: If market interest rates have decreased since you secured your original loan, refinancing could be advantageous, although this is less likely in a rising-rate environment.

5. Increased Car Value: In unique cases where your car’s value has appreciated, you might find refinancing easier as your loan-to-value ratio improves.

How to Refinance with Bad Credit

1. Check Your Credit: Start by obtaining your credit score and report. Look for any errors that might be dragging your score down and dispute them.

2. Shop Around: Compare rates from different lenders. Start with your existing lender and inquire if refinancing is an option. Use tools like NerdWallet's auto loan refinance calculator to compare potential new loan terms against your current one.

Check Out: Tips On How To Effectively Communicate With Your Auto Lender About Relief Options

3. Pre-Qualify: Ideally, choose lenders that allow you to pre-qualify with a soft credit inquiry, which won't impact your credit score. This step provides insight into the interest rates you might qualify for.

4. Understand Fees: Be aware of any fees associated with refinancing. Some lenders may charge origination or processing fees, which could offset the savings from a lower interest rate.

5. Apply Wisely: If you decide to apply, submit all your applications within a 14-day period to minimize the impact on your credit score, as multiple inquiries during this window are generally treated as a single inquiry.

If Refinancing Isn’t an Option

If refinancing isn't feasible due to your credit situation, consider other alternatives like requesting a co-signer or trading in your vehicle for a more affordable model.

Additionally, you could continue making timely payments on your current loan to improve your credit score and enhance your future financing options.

Must Read: Steps To Take If You Can't Afford Your Auto Loan Payments

Bottomline

Navigating auto loan refinancing with bad credit can be challenging, but understanding your options and shopping around can potentially improve your financial situation. 

Even if the conditions are not perfect, taking steps to better manage your existing debt can lead to more opportunities down the road.

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