If you originally took out a bad credit auto loan and now you need to lower your monthly payment, there’s a way to replace your current loan with another one: refinancing. Refinancing isn't always possible, since you need to meet certain requirements, but it can really help you save money if you do qualify.
What Is Auto Loan Refinancing?
Put simply, refinancing is replacing your old car loan with a new one. Almost always, the motivation for doing so is to lower your monthly auto loan payment and save some cash. You have to be mindful of how you refinance, though, or it could cost you more!
Refinancing can be especially helpful to borrowers who originally took out a bad credit car loan – that is, if their credit score has improved since the start of the loan. With a better credit score, it may be possible to qualify for better rates than you did when you first applied for the loan.
When you have less than perfect credit, you aren’t going to qualify for the best interest rates on an auto loan. However, if you have worked hard on your credit and you’ve stayed current on your car loan, you may be able to refinance and lower your interest rate to save money on your loan.
There are two ways to refinance: lower your interest rate, or lengthen your auto loan term. You can sometimes do a combination of both, if you qualify. The ideal way to refinance is by lowering your interest rate. If you extend your car loan term, it actually increases the amount you pay in the long run instead of saving you money.
By keeping the same interest rate and extending the loan term, your monthly payment does decrease, but you have to pay for longer, which wipes out any chance of saving. Lengthening your auto loan means more interest charges over the remainder of your loan, which costs you more than your original loan.
Car loans almost always use the simple interest formula, which means that you’re charged interest daily on the balance of your loan. Interest charges can stack up fast, especially if your interest rate was originally high, which is common for credit-challenged borrowers.
If you decide that refinancing your loan is the way to go, aim to qualifying for a lower interest rate. Only refinance to a longer loan term if it’s absolutely necessary. If you’re worried about affording the payments and fear default, extending your loan may help temporarily. Once you’re in a better place financially, you can work to make extra or larger payments to complete the loan quicker, so you can save on interest charges.
Refinancing Requirements and Bad Credit
Not everyone can refinance all the time, and not every vehicle is eligible, either. The refinancing requirements vary, but lenders often have similar standards.
The general stipulations for auto loan refinancing are:
- The car is less than 10 years old and has less than 100,000 miles (varies).
- You’ve had your auto loan for at least one year (varies).
- Your credit score is good or it has improved since the start of the loan.
- You’ve had a good payment history on the car loan with no missed or late payments.
- You owe less on the loan than the vehicle is worth (meaning you have equity), or your loan balance is equal to the car’s value.
One of the most important requirements is that your bad credit score has improved since you started the loan. The second most important stipulation is that your vehicle has equity. While lenders vary in their specific requirements regarding how long you’ve had your loan and the age of your car, you can’t refinance your auto loan if your credit score hasn't improved or you have negative equity.
If you believe you meet the requirements, you can start the search for a lender that can refinance your bad credit car loan. It's sometimes possible to refinance with your original lender, but most people look elsewhere for better rates. Taking the time to rate shop with a few different lenders can be a good idea.
If you want to start now, we want to help! Complete our refinance request form, at no cost, and our trusted partner will look for lenders in your area you can refinance with.
If Refinancing Isn’t in the Cards Right Now…
If you or your vehicle don’t meet the requirements right now, you still have a few options for getting a lower payment on an auto loan.
If you’ve come across hard times and you’re worried about defaulting on your car loan, talk to your lender. Odds are, they don't want you to default on the auto loan either, since they usually stand to lose, too. In tough times, you can try to talk to your lender about deferment options.
Had a major life event that’s making it hard to make your payments? Check with your lender to see if you qualify for a deferment program. Deferment usually means your car loan payments get pushed back to the end of the term, or paused for a little while. For example, if you have 43 months left on your loan and you defer your payments for three months to the back end of your loan, you now have 46 months left on your loan but you don't have to pay for those first three months.
Sometimes, deferment options are limited to pausing payments for a little bit, then all missed payments are due at the end of the deferment. Talk to your lender about your options, and do it before you miss a payment. Deferment options aren’t typically available if you’re already behind on your auto loan.
If deferment isn’t an option, it might be in your best interest to trade in your current vehicle for something more affordable.
Getting Into Another Auto Loan
If your next step is getting to another car loan because yours is too expensive right now, but refinancing isn’t an option, start the search with us at Auto Credit Express.
We match borrowers to dealerships that are signed up with subprime (bad credit) lenders. These lenders have the resources and the smarts to assist borrowers in all types of unique credit situations because they consider more than just your credit score during the loan approval process.
Get started by filling out our free auto loan request form, and we’ll get right to work looking for a dealer in your area.