How to Refinance a Bad Credit Car Loanby Brandon M. Dennis
It is still possible to refinance a car loan with bad credit, although you will almost always be stuck paying a higher rate. There are many factors involved in deciding how much you will have to pay and whether it is even feasible to refinance in this situation.
Your FICO Score Affects the Interest Rate
First, check your FICO score and ensure that it's accurate. This process is free and extremely useful in figuring out where you stand with respect to interest rates for auto refinancing. You may be surprised at how much you can save in the long run if you can squeeze in to the next FICO score range.
Other Factors Affecting Refinance Options
How long you have had the loan. It is better to refinance sooner rather than later, because of how auto loans are structured. Toward the start of your loan, you are generally paying off the interest, not the principle, so you can save more money on interest during this early period.
Age of the vehicle. It may be difficult to find a lender who will refinance an old car that has already depreciated in value too much.
Prepayment penalties on the initial loan. Some loans are structured in a way that penalizes you for paying off the loan earlier than expected. This could eat up your savings.
Fix Your Credit Before
This may seem like a completely obvious thing to mention, but many people feel as if it's impossible or that it would take years to see any result in fixing their bad credit, so they don't even try.
Your lender will look up your FICO score and credit reports from all three bureaus, so you should request them yourself ahead of time and at least attempt to fix any small errors. Don't make any drastic changes while trying to raise your credit and FICO scores. Lenders like to see consistency in your financial dealings. Try not to open or close any sources of credit, such as unnecessary credit cards, in a short-term attempt to influence your scores. If possible, pay off all outstanding debts that you can afford to and do not simply pass the debt over to somewhere else.
Use Online Resources
Now that you know your FICO score, and hopefully have been able to take steps to improve it -- even if only by a slight amount -- you should use a loan savings calculator to find out how much you will be paying based on your credit score. As you can see on this calculator, for a 36-month loan on a new car, the interest rate varies by a huge amount as you go down the scale of credit scores, and this will affect your options. It should become very clear how advantageous it is to clear up any mistakes in your credit reports.
Once you've taken steps to improve your credit score and overall financial credibility, you'll need to gather a few documents, including your W-2s for the last two years, two recent and consecutive pay stubs, bank statements for all of your financial accounts, signed tax returns, the most recently monthly statement for your current loan agreement and any other documents that would show that you have improved your financial credibility since applying for the original loan.
While you may need to meet with a representative at your lending agency to go over specific details of the refinancing process, most financial institutions allow you to apply or refinance a loan online.
Your FICO and credit scores are not the only important things to think about when refinancing a car loan, but they do play a large role in the process. If your scores are too low, or you can't secure an interest rate that is much better than what you're paying now, then it won't be worth the hassle of refinancing.