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You can refinance a car loan with bad credit, but improved credit could mean a lower interest rate.
If you’re not happy with your existing car loan, refinancing could help you swap it out for a new one that might have a better interest rate and a lower monthly payment. But if you have a bad credit score, you might be wondering: How soon can I refinance my car loan with bad credit?
We’ll provide the answer to that question, and some tips on how to boost your credit score below. But first, let’s discuss what it means to have bad credit.
Key Takeaways
What Is Bad Credit?
Since different lenders use different credit scoring models, the definition of “bad credit” varies. But it usually means you have negative remarks, such as a late payment or bankruptcy, listed on your credit reports.
That said, the most common credit-scoring models usually have scores that range from 300 to 850. In general, the higher your score, the better your chances of securing a lower interest rate.
Here’s a look at what’s a bad credit score, according to a widely used version of the FICO credit scoring models:
If your credit score is 619 or below, you have subprime credit, according to the Consumer Financial Protection Bureau. This means you’ll likely have trouble qualifying for the best interest rates available.
Although having a good credit score can help you secure a better interest rate, it’s possible to qualify for refinancing with a less-than-stellar credit score. The lowest qualifying score for refinancing varies by lender.
Some lenders specialize in offering loans to borrowers who have subprime or poor credit. And not only can you qualify, but it’s also possible to receive better terms and a lower interest rate.
For instance, according to the RateGenius State of Auto Refinance Report, borrowers who refinanced their car loans with subprime credit — with credit scores between 500 to 600 — in 2021 saw an average savings of $91 a month.
You can refinance your car loan as soon as you want, provided you meet a lender’s borrowing requirements. However, a better question to ask is: How long should I wait to refinance my car with bad credit?
Although there’s no minimum wait time required, waiting until your finances have improved could increase your refinancing options,and improve your chances of qualifying for more competitive rates and terms.
Here are some scenarios where it could make sense for you to refinance with bad credit:
When a lender reviews your auto loan refinancing application, your credit score isn’t the only factor it considers. It also reviews these factors, among others:
If you have a low credit score, applying for loans and not getting the best rate can be stressful. But the good news is that taking some of the following steps could raise your score.
Payment history is the most important credit scoring factor — it represents 35% of your FICO score. When you pay your credit accounts on time, it adds positive credit history to your credit reports. As a result, your credit score can increase over time.
But if you make late payments, it can cause serious damage to your credit. If you’re having trouble juggling multiple bills, you can enroll in autopay or create a bill tracking spreadsheet.
The second most important factor is your credit utilization ratio — the amount of debt you owe in comparison to your available credit. This credit factor accounts for 30% of your FICO score. Financial experts often recommend that you keep this ratio below 30%.
Paying down any revolving debt you have, such as credit card debt or personal line of credit, could improve your credit score.
Getting a secured credit card is another way to build credit using a credit card. This type of credit card is designed to help you build or rebuild credit. Unlike a traditional credit card, it requires a security deposit that helps establish your credit limit. If you pay your secured credit card bill on time, it can add positive payment history to your credit reports.
Credit reporting mistakes happen. If inaccurate negative information is reported on your credit reports it can drop your credit score. To catch any errors, review your credit reports from all three major credit bureaus — Equifax, Experian, and Transunion. You can view your reports for free weekly through Dec. 31, 2022, by visiting AnnualCreditReport.com.
If you find any errors listed on your credit reports, you can dispute them with the credit bureaus online, by mail, or by phone. You can also file a dispute with the creditor or financial institution that reported the information.
Whether or not car loan refinancing with bad credit makes sense depends on your unique financial situation. If your credit score has improved since taking out your original loan, you might be able to secure a lower interest rate. As a result, you could save thousands of dollars over the life of the loan.
But if your credit score has dropped, it’s probably best to take steps to boost your credit score before refinancing.
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