You may be able to refinance your auto loan with a less-than-stellar credit score.
There are a number of reasons you might want to refinance your new or used car. Maybe you’d like to lock in a better interest rate. Or perhaps your goal is to lower your monthly car payment and take charge of your personal finances.
Regardless of why you’re considering an auto refinance, more importantly, you might wonder what credit score you need to do so. Let’s take a closer look at how your credit score affects your ability to refinance and whether or not good credit is necessary.
What Is Good Credit?
First and foremost, it’s important to understand what it means to have good credit. While each credit score model is different, most credit scores range from 300 to 850. In general, credit scores from 580 to 669 are considered fair, 670 to 739 are classified as good, and 740 to 799 are very good. Any credit score that is higher than 800 is excellent.
- Exceptional: 800-850
- Very good: 740-799
- Good: 670-739
- Fair: 580-669
- Very poor: 300-579
There are a number of factors that go into your credit score, including your payment history, the amount of debt you owe, and how long your accounts have been opened. A higher credit score shows that you have a history of responsible credit behavior. This can make it easier for you to get approved for refinancing and secure lower interest rates and better loan terms.
Do I Need Good Credit To Refinance My Car?
Fortunately, you may be able to refinance your current auto loan even if you don’t have good credit. There are many lenders that offer auto refinancing to borrowers with fair or even bad credit. These lenders are willing to look beyond your credit score and consider other factors, which we’ll explore below.
You may also be surprised to learn that a high credit score doesn’t necessarily mean you’ll save more money when you refinance your car loan. In fact, according to RateGenius’ 2022 State of Auto Refinance report, borrowers with the highest credit scores saved the least after refinancing in 2021, $85 per month. Borrowers with credit scores 600 and below reduced their monthly payments by $91.
What Credit Score Do I Need To Refinance My Car Loan?
There is no minimum credit score for refinancing your auto loan. Each lender has its own unique requirements. Some lenders are more open to working with borrowers who have fair or poor credit. They might even approve those with a history of bankruptcies or repossessions.
Despite the fact that there isn’t a hard and fast credit score range required for an auto refinance, good credit is ideal. If you wish to refinance your new loan at a lower rate, having raised your credit score from when you applied for your original loan will likely work in your favor.
What Other Factors Affect My Auto Refinance Loan Application?
While your credit score is important, there are other factors that lenders will explore when reviewing your application, including:
Lenders will ask about your sources of income — whether you work a traditional full-time job, have a side hustle, or live off retirement or Social Security —when you apply for auto refinancing. The bank, credit union, or online lender will want to see that your income is sufficient enough to make your auto loan payments, and that you can afford the loan you’re applying for.
In addition to your income, lenders will want to understand your ability to handle debt. That’s where your debt-to-income ratio or DTI comes in. Your DTI is the total of all of your monthly debt payments divided by your income, expressed as a percentage. From a lender’s perspective, the lower your DTI ratio, the less riskier of a borrower you are.
(DTI) Debt-to-Income Ratio Calculator
What is your monthly income?
What are your total monthly debt payments?
Lenders also want to know about your loan-to-value ratio or LTV, which compares your loan amount to the value of your vehicle. The make and model of your car, as well as its mileage, will influence the retained value.
Your LTV is important because auto loans are secured loans and use your vehicle as collateral. If you default on your loan, your lender may sell your vehicle to cover the remaining balance. The LTV will determine if a lender will be able to cover their losses in the event of repossession.
Car (LTV) Loan-to-Value Calculator
Auto Loan Balance
The remaining amount you owe on your car loan matters to auto refinancing lenders. If you’re underwater or upside down on your car loan, new lenders might hesitate to approve your application. They may even require a down payment to offset the risk. In this case, it makes sense to make extra payments on your existing loan to eliminate the negative equity before applying to refinance.
Increasing your monthly payment by $0 will save you $0 in interest and you will pay off your loan 0 months sooner!
Keep in mind that weakness in one of these factors can impact what kind of rates you can receive. For example, if you have an Excellent credit score that’s higher than 750 — but your DTI exceeds the new lender’s maximum or your LTV is too high — it may still be difficult to get approved. This is particularly true if you don’t want to make a down payment on your auto refinance loan.
How Can I Increase My Chance of Refinancing?
If you don’t have good credit, there are steps you can take to boost your likelihood of getting approved for auto loan refinancing. Here are several suggestions to help you out:
Check Your Credit
Before you apply for an auto refinance, check your credit history. Visit annualcreditreport.com to pull copies of your reports from each major credit bureau (Equifax, Experian, and TransUnion) once a year for free. Be sure to review your reports carefully and thoroughly. If you find any errors or inaccuracies, dispute them with the appropriate credit agency. Mistakes on your credit report can hurt your credit and hinder your ability to get approved for refinancing.
Shop for Rates
There’s no reason to settle for the first auto refinancing lender you come across. Instead, do your research and shop around to lock in the best auto loan rates and terms for your situation. You might want to explore options from your current lender and different lenders. Don’t forget to take advantage of pre-qualification offers that won’t affect your credit.
Boost Your Credit
If possible, increase your FICO credit score before you apply for refinancing. Make it a priority to pay your mortgage or rent, car loan, student loans, and other bills on time. Also, pay down debt and don’t apply for new credit cards unless you absolutely need to. Another option is to use a credit tool like Experian Boost. It will allow you to include bills like monthly cell phone service, utilities, and streaming services in your credit score calculation.
Lower Your Debt-to-Income Ratio
Your debt-to-income ratio is your monthly debt payments divided by your gross monthly income. Since most lenders prefer a DTI below 50%, it’s wise to lower yours if higher than that. Start by increasing the amount you put toward your debt payments each month. Also, avoid taking on more debt and postpone large purchases so you’re utilizing less credit.
You Don’t Need Excellent (or Even Good) Credit To Refinance
If you don’t have a great credit score, don’t worry. There are many financial institutions willing to work with borrowers with less-than-perfect credit. Shop around to find the best refinance offer for you.