Refinancing an auto loan with bad credit is possible if you do the research and follow the correct steps. Refinancing makes sense because you are borrowing money from a new lender to pay off your higher interest debt.
You can’t reduce the amount of money you owe for the vehicle, but you can reduce the total interest you will pay. Your goal should be to pay the least amount of interest as possible.
Important facts for Bad Credit Refinancing
- Your Credit Score
A great place to start when considering refinancing with bad credit is understanding your credit score. Banks use your credit score to determine if they will lend you money and what interest rates they will offer. When refinancing a bad credit auto loan, you should understand that your interest rate most likely will not be as low as someone who has a prime credit score, but refinancing could potentially lower your payments significantly.
There are many reputable companies that can help you improve your credit score. Improving your credit score might be the fastest way to lower your high interest rate. (If you choose to work with a credit repair company we recommend their goal should be to improve your score in 30-90 days. Beware of companies that are locking you into a long term plan to improve your credit.)
- Your Car's Loan-to-Value (LTV)
Understanding the value of your car versus what you owe is an important factor in refinancing a bad credit auto loan. If you owe 50% or more than what your car is worth it could diminish your ability to refinance your bad credit auto loan. (We see banks that lend up to 170% of the current value of your car but those numbers vary based on credit and other factors.)
Before refinancing a bad credit auto loan, consistently make your payments on time. Consistently making payments on time should improve your credit score. A higher credit score, compared to when you first financed your car, could allow you to reduce your payments.
Any bank that is working with you, will need to verify your information. This will ALWAYS be required when you apply for a loan with bad credit. That said, many of the information they require is fairly minimal. We put together a checklist for your convenience:
Bad Credit Auto Loan Refinancing Checklist
Make sure that you prepare the following before Refinancing your Bad Credit Auto Loan:
- Employment Status
- Immigration Status
- Military Status
- Income Proof:
- Bank Statements
- Court Documents
- Tax Returns
- Award Letters
- Verification Documents
- Proof of Income
- Proof of Residence
- Insurance card/Declaration Page
- Driver License/Government issued ID
- Registration (State Specific)
NOTE: The information contained herein is for educational purposes only and is not legal advice. You should seek advice from a legal professional regarding your particular situation.