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Considering an auto refinance loan but nervous about your credit score? Don’t worry, there are other factors that can work in your favor.
Are you in the market for a new auto loan? If so, you’ve probably wondered, “What does my credit score need to be to refinance a car?”
Much to the surprise of many vehicle owners, there’s no true minimum credit score to qualify for auto loans or refinancing. There are plenty of subprime lenders that offer loans to borrowers with bad credit — even if your credit score is well below 600.
However, don’t get tunnel vision and solely focus on your credit score; it’s only one factor that auto lenders consider when deciding whether to issue you a new loan. Lenders also look at your income, debt, existing car loan, and vehicle.
What Factors Impact My Auto Refinance Loan Application?
Credit scores can give people a false sense of security or deter others altogether from borrowing money. These are big mistakes. Credit scores are a big factor when it comes to getting a loan, but they aren’t the only factor.
Let’s walk through the factors lenders use to judge your auto refinance loan application. Note that the following factors are not organized by weight or importance.
While there isn’t a universal minimum, your credit score still impacts your loan application. Obviously, higher scores are better — but what’s a good credit score versus a bad one?
You actually have more than one credit score because there are multiple scoring models provided by different providers (e.g. VantageScore). That said, lenders typically rely on your FICO Score, which is divided into the following ranges:
- Exceptional: 800-850
- Very good: 740-799
- Good: 670-739
- Fair: 580-669
- Very poor: 300-579
Beyond simply getting approved, a good credit score can help you receive a better interest rate and more favorable terms. If you have bad credit, you aren’t out of luck — the rest of your financial profile can still offset your credit misfortunes.
Before you apply, make sure to check your credit reports for errors or issues. Yes, we meant to pluralize “report” because there are three major credit bureaus — Experian, Equifax, and Transunion. And don’t worry, It’s free to check your credit.
When you apply for an auto refinance loan, lenders will ask about your sources of income. Why? If a bank or credit union is going to lend you money, it will want to see that your income is stable and sufficient to continuously meet debt payments. In short, they make sure that an applicant can afford a loan.
Beyond validating your earnings through proof of income, auto lenders also use a simple metric to evaluate your ability to handle debt: the debt-to-income ratio (DTI).
Your DTI is a simple calculation: the ratio of your monthly debt payments to your monthly income, expressed as a percentage. For example, let’s assume you made $1,000 of debt payments and $4,000 of gross income last month; your DTI would be 25%.
(DTI) Debt-to-Income Ratio Calculator
What is your monthly income?
What's your total monthly debt payments?
Keep in mind — “debt payments” means all of your monthly payments, including payments for rent or mortgage, credit cards, and student loans. If you pay alimony and/or child support, those count too.
Along the same lines, there are various types of income, including:
- Self-employment income
- Rental property income
- Investment dividends
- Pension income
- Social Security income
Much like a credit score, there isn’t a DTI that automatically disqualifies you from getting an auto refinance loan. Based on RateGenius’s review of auto refinance loan application data from 2015 to 2019, 90% of approved applicants had a DTI of less than 48%. That said, if you have a DTI above 50%, you’re not out of luck (which we’ll explain in more detail below).
Your car matters. But lenders don’t necessarily care if you drive a Nissan or a Mercedes. More importantly, they want to know your car’s value relative to your loan, so your vehicle’s model year, condition, and mileage are important factors. For instance, a 2008 Ford Mustang has likely depreciated more than a 2018 Ford Mustang.
Similar to your income, there’s also a metric that lenders use to evaluate the value of your vehicle: your loan-to-value ratio (LTV).
Your LTV compares the size of your loan to the value of your vehicle. Auto loans are secured loans, meaning the underlying asset (in this case, your car) is used as collateral. If you stop making loan payments or default on your loan, your lender has the right to sell the vehicle to cover the outstanding loan amount. Your LTV helps a lender see if they can cover their loss if they ever have to repossess and sell your used car.
Car (LTV) Loan-to-Value Calculator
There also isn’t a set LTV that’ll prevent you from qualifying for an auto refinance loan. If you haven’t noticed, there’s a recurring theme here. That said, lenders typically prefer new vehicles — particularly ones that have less than 120,000 miles and are less than 10 years old.
What Credit Score Do I Need to Refinance My Car?
Lenders look at your entire financial profile, but that doesn’t mean you can’t estimate your chances of qualifying based on the factors we’ve mentioned. RateGenius analyzed 2020 auto refinance loan data and determined average credit scores by three metrics:
- Debt-to-income ratio
- Loan-to-value ratio
Generally, the higher your DTI and LTV, the better your credit score must be in order to get approved. The average credit score of approved applicants with DTIs above 50% was 725 — far from excellent, but still a good score.
You might be more surprised to hear that the average credit of an approved applicant with an LTV between 100% and 109% was a 714. In other words, these borrowers’ existing car loans were upside-down and they still got approved.
Unsurprisingly, borrowers did not need an excellent credit score if their income exceeded $75,000. More income translates to an easier time affording more debt. So, if your score doesn’t qualify as “good,” you can still make up for it in other areas. Likewise, if you have a good score, you aren’t guaranteed to qualify if the other application factors aren’t on par.
What’s the Minimum Credit Score to Refinance a Car Loan?
So how low can a credit score go and still get approved for auto loan refinancing? The answer is: quite low.
We dug into the RateGenius database to find the lowest credit scores in 2020 and 2021 and found applicants with scores in the 400s were able to get approved for auto loan refinancing with one of our lenders.
When looking at the tables below, you’ll notice a few things:
- Interest rates are high: Getting a competitive rate is harder with a lower credit score, but refinancing can still lower your rate several points.
- Loan-to-value ratios are low: An LTV below 100% means you have positive equity in your vehicle, something lenders really like since it makes your loan less risky for them.
- Debt-to-income ratios are also low: While auto loan lenders can accommodate DTIs of 50% or more, a lower DTI can indicate that you’re currently handling credit responsibly, even if your score doesn’t reflect that.
- Sometimes you need a cosigner: Adding a cosigner or co-borrower with a stronger credit profile may not only help you get approved but also get better interest rates too.
Just because you have a bad credit score doesn’t mean you shouldn’t try to get a better car loan. The key is to find a lender that will work with you and help you save money too. The examples below are proof that a high credit score isn’t necessary to refinance your auto loan.
How to Improve Your Chances of Qualifying for an Auto Refinance Loan
If you’re worried about qualifying for an auto refinance loan, don’t fret — you have options. Improving your financial profile takes a concerted effort, but it’s doable. Whether your credit score could use some work or your existing debt balance is high, there are several routes you can take.
Boost your credit
Just because your credit score isn’t the only factor doesn’t mean it’s not an important one to target. Your credit score consists of five factors:
- Payment history
- Credit utilization
- Length of credit history
- Credit mix
- New credit
While you can’t fast forward time and lengthen your credit history or erase late payments, you can take other steps. For instance, you could apply for a credit builder loan, which is designed to help borrowers work toward lower credit scores.
You could also use credit tools like the Experian Boost to bump up your score. These programs allow you to incorporate bills for your phone, utilities, and streaming services into your credit score calculation.
Reduce your outstanding debt
Since your DTI accounts for all of your debt payments, you can improve this metric by paying off other loans. For instance, if you have a personal loan balance, you could pay the principal down to reduce monthly obligations. As a result, you’ll improve your debt-to-income ratio.
Shop around for the best interest rate
More likely than not, you didn’t buy the very first car you saw when you pulled up to the dealership. There may have been a car prominently placed at the entrance, but you obviously weren’t forced to buy that particular vehicle. Similarly, you aren’t tied to the first lender you come across. You can shop around — you may even find a better interest rate, better loan terms, and more accommodating lender.
Pay down your existing auto loan
Paying off some of your current loan can provide multiple benefits. First, it can significantly improve your chances of securing a new car loan because your LTV will decrease. Second, it reduces your loan’s total interest and your monthly car payments. You save more money and lessen the financial burden on your income. Think of it as a down payment on your new auto loan.
If you’re strapped for cash though, this isn’t the best route to take — you don’t want to jeopardize your financial stability.
Apply with a cosigner
Even subprime borrowers have plenty of financing options. If you think you’ll have a hard time getting approved for an auto refinance loan by yourself, you can apply with a cosigner — for most people, this is usually a parent or relative.
In essence, you use the cosigner’s credit to qualify for the refinance loan. You’re still responsible for the loan, but the cosigner is obligated to take responsibility if you stop making payments. This is an easier way for nonprime borrowers to get better auto loan rates.
Increase your income
Earning more money is way easier said than done, but it’s an accessible route to qualifying for an auto refinance loan. This could mean a formal or informal part-time job. Thanks to the internet, it’s never been easier to join the gig economy. Even if you can manage to earn an additional $100 a month, you’ll improve your DTI and potentially qualify for a new loan.
Don’t Let Your Credit Score Deter You
Credit scores are useful and insightful metrics. They’re a good indicator of someone’s creditworthiness. However, that number alone does not define you and your personal finances. You don’t need perfect credit to get a loan. You don’t even need perfect credit to get the best rates.
It’s also not a static number — even small changes or actions can improve your credit score. So, if you’re a deep subprime borrower with poor credit, don’t let that stop you from trying to qualify for a refinance loan. Especially if your other factors are above average.