Refinancing a Car Loan with Bad Credit

While it might seem unlikely, the reality is refinancing a car loan with bad credit is doable. Further, there are some real benefits to be derived from doing so.

These include securing a more affordable monthly payment, reducing your interest rate and, in some cases, even getting cash back to help with other financial obligations.

Taking the following steps will improve your chances of success.

Review Your Credit History

Ok, so you’re pretty sure your credit score is less than ideal. However, part of the problem might well stem from errors on your credit report. Go to AnnualCreditReport.com and request copies of your credit reports from each of the big three reporting agencies (Experian, Equifax, TransUnion). Federal law requires these be provided free of charge on an annual basis.

With your reports in hand, you can look for any factual errors, as well as transactions you don’t recognize. Yes, it is entirely possible for someone else to use your credit without your knowledge and do damage to your reputation in the process. Once you’re satisfied your history is as clean as possible, prepare to shop around for the best deal.

Gather the Proper Documentation

Most lenders will ask for some combination of the following to process your refinance application:

  • Social Security number, current address, and (if you haven’t lived in your present residence at least two years) previous addresses
  • Proof of employment covering existing and previous workplaces, along with addresses and contact information
  • Pay stubs or W2s (self-employed individuals may use the previous year’s tax return) to verify income
  • Name of the current lender and the account number
  • Current payment and payoff amounts

You’ll also be asked to provide the year, make and model of the car, along with its current mileage reading and vehicle identification number.

Start with Your Current Lender

If your payments have always been on time and your credit history has shown some improvement, you may find your existing lender is willing to rewrite your loan at a better interest rate. This will lower your payments and, if you have equity in the car, you might even qualify for some cash back.

If they refuse, there is a whole host of lenders out there willing to refinance a car with bad credit. Online finance companies like RoadLoans accept applications from people with all types of credit — including bankruptcies. A word of caution here though: If you have to shop around, each lender you approach will want to review your credit report.

Before you begin, make a list of the companies with which you’d like to work and submit all of your applications simultaneously. This will minimize the detrimental effect applying for the refinance will have on your credit report. Multiple inquiries of the same type are counted as one when made within a short period of time.

Make Sure the Conditions are Right

Refinancing a car loan with bad credit (or any credit for that matter) only makes sense under certain circumstances. In general, the car should be less than five years old and its mileage should be in line with what lenders expect to see. In some cases, that can be less than 75,000 miles.

Be certain interest rates have dropped since you got your original loan. Or, make sure your current credit history will garner you a lower interest rate than the one you have.

Avoid accepting longer terms whenever possible and take into consideration the fees associated with getting a new loan when you’re calculating the potential savings.

Following these guidelines will give you the best shot at a successful car loan refinance with bad credit.