Many times, borrowers with bad credit need to take out a subprime auto loan in order to finance a vehicle. Because their credit isn’t stellar, their original annual percentage rate (APR) is also likely to be very high – possibly close to 20 percent. Even though the interest rate they pay is higher than average, they don’t need to stick with it forever. The best way to lower the APR and save money is by refinancing the loan.

Questions to Ask Yourself before Refinancing a Car Loan

It can take some time before you’re able to refinance your car loan, especially if you started out with bad credit. If at least two years have passed since taking out your original auto loan, and you’re looking to lower your monthly payments and save money in the long run by lowering your APR, there are four things you need to ask yourself:

Refinancing Car Loan TipsWhy should I refinance my car loan?

What do you want out of your new loan? Don’t just refinance blindly, sit back and really ask yourself what it is you want out of refinancing. Are you looking for a better interest rate, lower monthly payments, or do you want to extend your loan term? These are all valid reasons for refinancing your car loan. Be careful if you choose to extend your loan term. While you lower your monthly payment, you end up paying more in the long run and you’re putting yourself at risk of being upside down in the loan while your vehicle continues to depreciate in value.

Where does my credit currently stand?

Your credit score is one of the biggest factors that determines whether or not you qualify for refinancing. If you find your credit score has improved significantly over time, you can proceed with the refinancing process. There are many ways to view your credit score, but we recommend that you try to get your FICO score, as this is one lenders use most often.

What’s my car currently worth?

Your car’s value is important when refinancing. In fact, it can even be a deciding factor for the lender. Many lenders have specific vehicle requirements for refinancing, such as how old the car is, how many miles are on it, how much equity there is (or isn’t), and what condition it’s in. Specifics vary by lender, but if the vehicle is older, and or has higher mileage, it can be difficult to qualify for refinancing. In addition, you won’t be able to refinance if there’s negative equity involved, unless you’re able to pay the difference out of pocket. To find out how much your car’s worth, you can get it appraised by a dealership, or you can visit valuation sites such as NADA Guides to see what your vehicle’s estimated value is.

Where do I go to refinance?

There are many options to choose from when it comes to finding a lender to refinance your car loan. If you have a good history with your local bank or credit union, you should try them first. If they’re unable to give you an offer, or give you one you don’t like, you can continue to rate shop for offers by going online or visiting other local lenders. You can also fill out the simple and free refinance request form on our website to find and compare quotes through our trusted partner.

Be careful when rate shopping, and make sure you shop and choose a deal within the given time frame – usually around 30 days – so you don’t end up with multiple hard inquiries listed on your credit reports.

Car Refinancing Example

You can estimate how much you can save by refinancing with online tools and calculators. Let’s look at a example someone could experience:

Tina had a credit score of 587 when she took out her auto loan. She qualified for a subprime auto loan at a 16 percent interest rate, a loan term of 60 months, with a loan balance of $12,000 and monthly payments of $300. Two years passed, she kept up with her bills and other loans, and raised her score to 630. She goes to a local lender, and she’s offered this…

  • Refinance amount: $9,000
  • Interest rate: 9 percent
  • Loan term: 36 months

… and her numbers end up looking like this:

Current loan New loan Difference
Monthly payment $300 $286.20 Decreases by $13.80
Months remaining 35 36 Increases by one month
Interest remaining $5,262 $1,303.20 Decreases by $4,033.12

The Bottom Line

Refinancing can help you save money on interest and/or your monthly payment, but not everyone can qualify. If you started out with bad credit, it can take a number of years before you’re able to refinance for a better interest rate.

While we can’t help with refinancing, we can connect you to a dealer who can help you through your financing journey. At Auto Credit Express, we work with local dealerships that specialize in helping consumers in poor credit situations. These dealers have lenders that know how to handle car buyers dealing with various unique credit issues. Our service is free and easy to use. Get started today by filling out our secure auto loan request form.