How to Refinance a Car with Bad Credit

How to Refinance a Car with Bad Credit

In order to get approved for an Auto refinance Loan, you had to dress up and go to the bank or Credit union. You can now apply for a Loan and get approved without ever leaving your bed.

Before applying, you need to be familiar with your Credit history. This can be done by pulling your annual credit reports from all three Credit bureaus.

Remember that your annual free Credit report will only show you your actual Credit score. You can check the Credit score in many other ways.

Although you may be able to get refinance financing from some lenders even if your Credit score is low, your Credit history must be clean in order to be approved. This means that your Credit score today must be higher than it was when you received your original Loan.

How to Refinance a Car with Bad Credit

Lenders also require proof of regular on-time payments for your loans. This means that you are current with your payments and have not made late payments in recent years.

You can select a lending network if you have checked all the boxes. You may get a decision in as little as 10 minutes.

After you have completed your form, the network will submit your request to its partner lenders. This can lead to multiple Loan offers. After you have selected a Loan, the network will direct you to the lender’s site, where you can complete all the paperwork and close the deal.

Your previous lender will receive the Loan funds and your Auto Loan will be paid by the lender. The lender will then send your Loan funds to your previous lender. You will then make your monthly payment to the refinance agency, exactly as you did to the former lender.

Benefits of Auto refinancing

Refinancing an Auto Loan has the greatest advantage: you can reduce your monthly payments by choosing a Loan with a lower interest rate or a longer repayment period. You may be able to lower the total cost of your vehicle Loan in some cases.

Remember that while extending your repayment period can reduce your monthly payment, it can also add interest charges for several months or even years that increase the overall Loan cost.

RoadLoans.com is one of these lenders. They offer cash-back refinancing options which allow you to borrow your full Blue Book value and tap into the equity in your existing Auto Loan. This means you can borrow the full value of your Car‘s Blue Book value and pay off some of your existing debt. You can also use the rest of the Loan for any other purpose.

Check for closing fees and processing costs before you choose a lender or Loan.

The disadvantages of Auto refinancing

Online lending networks allow you to access many lenders through one application. This alone can increase your chances of approval, even if you have poor Credit. This also means that each Loan offer you get will come with different terms and conditions.

Lenders may add origination fees to make the Loan more costly than it appears. These fees can be tricky so ensure you understand what you will have to repay before you agree to a Loan.

You could pay more depending on the terms of your Loan. You can reduce your monthly payment by extending the repayment period of your Loan, but it may increase the overall cost of your Loan.

A $15,000 Loan with 3.5% interest for 36 months would cost $15,823 to repay at $440 per monthly. You can save $167 per month by extending the Loan for 60 months. However, you will also have to pay $16,373 ($550) to repay your Loan.

What is the best time to refinance your Car Loan?

In many cases, refinancing an automobile Loan is a smart decision. If you are:

  • Your Credit score has improved since you first financed the vehicle.
  • Your current interest rate exceeds today’s average rates
  • Your current lender is making you unhappy
  • Your monthly payment can be reduced by increasing your APR or extending your repayment term.
  • You would like to borrow money through cash-out refinancing
  • Your current Loan balance is $7,500 or greater

If you have paid off the majority of your existing Loan or your vehicle has many miles, refinancing your Loan might not be a good idea. Refinancing may be difficult if your Car‘s value is less than the amount you owe.

If I have a bad Loan, can I refinance my Car?

Most cases, the answer to this question is no.

If you are upside down on an Auto Loan, it means that you owe more than the car’s current value. It is extremely difficult to refinance your Auto Loan as the new lender will use Car‘s current value to determine how much they are willing to lend.

A lender might consider lending $15,000 to $17,000 vehicle. The lender may repossess your vehicle and sell it if you fail to repay the Loan.

If the lender extends a $20,000 mortgage for a $17,000 vehicle and you default, then the lender takes a minimum $3,000 loss. We have yet to find a lender that is willing to take a loss.

To refinance a Loan you are upside down on, make additional payments to your lender until your loan to value ratio improves to the point that you owe less than your Car is worth.

Loan-to-Value Ratio for Auto Loans

When your Loan is paid off, you will be able to apply for refinancing with the above lenders.

Is Refinancing Bad for Your Credit Score?

The new lender will send money to the old lender to repay the Auto Loan. The former lender must notify the credit bureaus about your satisfaction with that Loan. However, it may take up to 60 business days for it to appear in your Credit report.

Your Credit file could show two outstanding Auto loans during that period. This added debt can temporarily affect your Credit score. Your Credit score will rise once the old Loan is paid off.

Refinance loans can add an additional inquiry to your Credit file. Each time you apply to any type of Credit or Loan, the lender makes a request on your Credit file.

Although inquiries remain on your Credit reports for two years, their impact on your score decreases over time. Although lenders don’t mind receiving a few inquiries at once, if you have four or more over a two year period, your Credit score can drop.

Chart Showing Time Items Take to Age Off a Credit Report

Inexpensive Credit applications can make you appear desperate to lenders, which will cause them to pause before considering your application. Refinance applications can make your score drop if you have too many Credit inquiries.

Which company is best to refinance an Auto Loan?

Because every applicant is different, there is no clear-cut best refinance company.

Auto Credit Express may be the best choice for you if your Credit score is low. This is because the network partners more than 1,200 lenders, many of which are specifically for bad Credit applicants.

RoadLoans.com may be the best choice if you are looking for a Loan to pay more than what you owe on a Car. The network’s cash-out refinancing lets you borrow up to 90% off your vehicle’s Kelley Blue Book value.

Part of the proceeds can be used to pay off an existing Loan, while the remainder can be used to make your own purchases. This type of Loan is not offered by every refinance company.

Capital One may be the best choice if you are looking for a trusted name and company. This global brand is a success story with many financial products to suit all needs.

What Credit score is required to refinance with Capital One

Capital One has several minimum standards regarding Auto loans. These requirements vary depending on whether you are purchasing a Car or refinancing an existing vehicle. Minimum Credit score required to refinance an automobile Loan is540The minimum amount required to buy a vehicle is500.

The applicant must also have a minimum of $1,500 to $1,800 per month in verifiable income. Your Credit score will determine how much income you are required to earn.

Capital One will not accept any refinance application from residents of Alaska and Hawaii.

A minimum Credit score of 540 is required to refinance your Auto Loan with Capital One.

These are not the only requirements to be approved. Any vehicle that is up for refinance must be at least seven years old, have a minimum $7,500 (maximum $50,000), and still have the Loan balance. Also, you must be current with your payments to an FDIC-insured lender and reporting your payment history to at minimum one major Credit bureau.

These requirements are met and you can apply online to the bank for Credit within 24 hours.

Advantages of Auto Refinancing

The biggest advantage of refinancing an existing Auto Loan is that you can lower your monthly payment by choosing a refinance Loan with a lower APR than your current one or a longer payoff period. In some cases, you can lower the overall cost of your vehicle Loan.

Just remember that extending your repayment window can lower your monthly payment, but add several months (or even years) of interest charges that make the overall Loan cost greater.

Some lenders, such as RoadLoans.com, offer cash back refinancing options that allow you to tap into your current auto loan’s equity and borrow your Car’s full Blue Book value. That means that you can use part of the refinance Loan to pay off your existing debt and use the remainder of the Loan in any way you choose.

Before you pick a Loan and lender — especially one that touts that it can save you money — check for any processing costs or closing fees that can make the Loan as expensive (or even more expensive) than your current Loan.

Disadvantages of Auto Refinancing

Online lending networks provide access to many lenders with a single application. That alone will improve your chances of approval despite having bad Credit. But it also means that every potential Loan offer you receive will have varying terms and conditions.

Some lenders tack on origination fees that make the Loan more expensive than it seems on the surface. Those fees can get tricky, so make sure you know exactly what you’ll have to pay back before you accept a Loan.

Depending on the terms of the Loan, you could also end up paying more in finance charges. Extending your Loan’s repayment window can lower your monthly payment but may also increase your overall cost of the Loan.

For example, a $15,000 Loan at 3.5% interest over 36 months will cost $15,823 to pay off at $440 per month. If you extend that Loan to 60 months, you’ll save $167 every month, but also pay $16,373 ($550 more) to pay off your Loan.

When Should You Refinance Your Car Loan?

Refinancing an Auto Loan makes sense in many conditions. You should consider applying for a refinance Loan if:

  • You’ve improved your Credit score from when you originally financed the vehicle
  • Your current interest rate is above today’s average rates
  • You’re unhappy for any reason with your current lender
  • You want to lower your monthly payment by reducing your APR or lengthening your repayment period
  • You want to borrow money via cash-out refinancing
  • You owe $7,500 or more on your current Loan

Refinancing your Loan may not make sense if you’ve paid off most of your existing Loan, or if your vehicle is older and has a lot of miles on it. You may also have trouble refinancing if you owe more than what your Car is worth, as we explain in the next question.

Can I Refinance a Car if I’m Upside Down on My Loan?

In most cases, the answer is no.

Being upside down on your Auto Loan means that you owe more than what the car is currently worth. This makes it incredibly difficult to refinance your Loan because the new lender will use the Car’s value to determine how much he or she is willing to lend.

For example, a lender may consider lending $15,000 on a vehicle that’s worth $17,000. If by some chance you default on the Loan, the lender can repossess the vehicle, sell it, and recoup some of the money lost by your backing out of the deal.

But if the lender extends a $20,000 Loan for a $17,000 vehicle — and you default on the deal — then he or she takes, at minimum, a $3,000 loss on the Loan. We’ve yet to find a lender who is OK with taking a loss.

The best way to obtain refinancing on a Loan that you’re upside down on is to make extra payments to your existing lender until your loan-to-value ratio improves and you owe less than the Car is worth.

Loan-to-Value Ratio for Auto Loans

Once you’re no longer upside down on your Loan, the lenders listed above will be more likely to consider your application for refinancing.

Does Refinancing Hurt Your Credit?

When you refinance your Auto Loan, the new lender sends money to the previous lender to pay off the debt. The previous lender must report to the credit reporting bureaus that you’ve satisfied that Loan, but it can take up to 60 days for it to appear on your Credit report.

During that time, your Credit file may show that you have two outstanding Auto loans. That added debt could temporarily cause a drop in your Credit score. Once the old Loan reflects the payoff, your score will improve.

Applying for a refinance Loan can also add a hard inquiry to your Credit report. Every time you apply for any type of Loan or Credit, the lender places an inquiry on your Credit file to see its contents.

Inquiries remain on your Credit report for two years, but their impact on your score lessens over time. Lenders don’t mind seeing a few inquiries at a time, but once the total reaches four or more in a two-year period, it can start to lower your Credit score.

Chart Showing Time Items Take to Age Off a Credit Report

Excessive Credit applications make you look desperate to most lenders and will give them pause when considering your application. If you already have an excessive number of inquiries on your Credit file, a refinance application can cause your score to drop by adding an extra inquiry to your Credit report.

What is the Best Company to Refinance an Auto Loan with?

There isn’t a clear-cut best company to refinance with, as every applicant has different needs.

For example, if you have a very low Credit score, you may find Auto Credit Express is your best option. That’s because the network partners with more than 1,200 different lenders — many of whom deal specifically with bad-credit applicants.

If you’re looking to take out a Loan for more than you owe on your Car, you’ll likely find RoadLoans.com is your best option. That’s because the network’s cash-out refinancing allows you to borrow up to 90% of your vehicle’s total Kelley Blue Book value.

You can use part of the proceeds to pay off your existing Loan and keep the rest for yourself to spend how you choose. Not every refinance company offers this kind of Loan.

But, if you’re looking for a company with a name you likely know and trust, you may consider Capital One to be the best. The worldwide brand has a long history of success and offers numerous financial products that meet the needs of all consumers.

What Credit Score is Needed to Refinance with Capital One?

Capital One sets several minimum standards for its Auto loans, with requirements changing depending on whether you’re purchasing a vehicle or refinancing your existing ride. The bank’s minimum Credit score for refinancing an automobile is 540, whereas the minimum needed to purchase a vehicle is 500.

Applicants must also have between $1,500 and $1,800 in verifiable monthly income. The lower your Credit score, the higher the income requirement.

Capital One does not accept refinance applications from residents of Alaska or Hawaii.

Capital One Screenshot
A minimum Credit score of 540 is required to refinance your Auto Loan with Capital One.

Those aren’t the only requirements for approval — any vehicle up for refinancing must be no more than seven years old and have a minimum of $7,500 (maximum $50,000) still owed on the Loan. You must also be current on your payments to a lender that is FDIC-insured and currently reporting your payment history to at least one major Credit reporting bureau.

If you meet these requirements, you can apply directly on the bank’s website and receive a Credit decision within 24 hours.