When you hear about refinancing a car loan, you may not completely understand what it means. Refinancing an auto loan essentially means you're replacing your current loan with a new one, ideally with better terms. Refinancing is a great option for those who initially took out a bad credit car loan with a high interest rate. Curious as to why? Keep reading to find out.
Why Is Refinancing an Auto Loan a Good Idea?
For those with bad credit, qualifying for an auto loan with a low interest rate is difficult. According to Experian, the average subprime buyer (501 to 600 credit score) ends up getting an interest rate of 12 to 17 percent. A higher interest rate makes the overall cost of the loan go up.
Refinancing gives these borrowers a chance to lower their interest rate, which also lowers their monthly payment. On the other hand, borrowers who are struggling to make their payments can refinance and extend the loan term to provide short-term relief.
Right and Wrong Times to Refinance a Car Loan
Unfortunately, people with bad credit typically can’t refinance a car loan right away – there's a right time to do it. Lenders like to see that around one or two years have passed, so there's an established payment history on the loan and their credit scores have a chance to improve.
As time passes and these bad credit borrowers improve their credit scores with the help of their auto loans, they can look into refinancing. When they decide to refinance a car loan, they have two options to help them lower their monthly payment:
- Qualify for a better interest rate – If their credit scores have improved since taking out the initial loan, they may be able to qualify for a lower interest rate. If they want to further improve their chances of this happening, they can add a cosigner or co-borrower to the new loan.
- Extend the loan term – If the monthly payment is the main issue and their credit scores haven’t changed much, they may be able to extend the loan term to lower the monthly payment. These borrowers end up paying more in interest charges in the long run in exchange for short-term, month-to-month relief. If their financial situation is ever solved, they can always increase what they pay each month to pay off their loans sooner.
The Bottom Line
Auto refinancing is great if you can get a lower interest rate and/or a lower monthly payment. Remember, most lenders want to see that your credit score has improved since taking out the original loan before they consider you for refinancing.
Auto Credit Express can help you find the refinancing deal you’re looking for with our refinance request form. On the flip side, if you need a vehicle in the first place, we can jump-start your car buying journey by connecting you to a local dealer that knows how to handle unique credit situations.
At Auto Credit Express, we’ve been assisting credit-challenged buyers for over 20 years, and we want to help you, too. Our service is free, easy, and fast. All you have to do to get started is fill out our auto loan request form, and we’ll get right to work connecting you to a dealership near you.