There are many factors that can lead to bad credit. Your credit may suffer after a major event in your life such as a divorce or the loss of a job. It could also suffer if you accidentally missed a few payments or fell behind on your bills. In other words, bad credit can happen to anyone.
Unfortunately, a bad credit score can impact your life in many ways. Having a bad credit score can make it harder to finance a home or open new lines of credit. If you are approved, you may end up paying more in interest as a result of your credit. A bad credit score can even make it harder to rent a home and deal with the utility companies once you move in.
But what about auto loan refinancing? Everyone’s financial situation is unique, but in general, you don’t need perfect credit to qualify for auto loan refinancing. Here’s what you need to know about how to refinance an auto loan with bad credit:
What is Refinancing?
First, it’s important to understand how refinancing an auto loan works. Refinancing is the process of taking out a new auto loan to pay off the remaining balance on your existing auto loan. Even though you are taking out a new loan, you will only have one auto loan payment to make once the refinancing process is complete. Basically, the new auto loan will replace your old auto loan.
Refinancing can help you get rid of a loan with unfavorable terms and replace it with a loan with better terms.
Am I Eligible for Auto Loan Refinancing?
Every lender may have slightly different eligibility requirements. But in general, the eligibility requirements for auto loan refinancing are the same as the eligibility requirements for auto loans.
Your lender may consider many factors when determining your eligibility, including:
● Your ability to repay the loan
● How much your vehicle is worth
● Your credit history
As you can see, your lender will consider your credit when determining your eligibility for refinancing. However, a bad credit score won’t automatically make you ineligible for refinancing. Because an auto loan is a secured loan, your credit score is just one factor that is taken into consideration. Other factors, including your income and the resale value of your vehicle, will also impact the lender’s decision.
In short, this means you may qualify for refinancing even if your credit isn’t perfect.
What Are the Benefits of Refinancing?
There are a number of potential benefits of refinancing an auto loan, including:
● Lower interest rate. If you refinance, you may be able to secure a new auto loan with a lower interest rate. The lower the interest rate, the less you will pay in interest over the course of the loan. This is one of the main reasons why people choose to refinance their auto loans.
● Extended loan term. If you need more time to pay your auto loan, you may want to consider refinancing and extending your loan term.
● More affordable payments. If you’re struggling to make your current auto loan payments, refinancing might help. If you can secure a lower interest rate on your new loan, this will lower your monthly payments, which may make your auto loan more affordable. Even if you can’t secure a lower interest rate, extending the term of the loan will lower your monthly payments.
● Avoid defaulting on your existing loan. Many people choose to refinance when they can no longer afford to pay their existing loan. Refinancing will pay off your existing loan, so you only need to worry about making payments on your new loan.
Should I Refinance My Auto Loan?
Some people may benefit from refinancing, whereas others may not. If you’re considering this option, it’s important to understand whether you will benefit from refinancing your auto loan.
You may want to refinance your auto loan if:
● Interest rates are lower. It’s normal for interest rates to fluctuate. If you’re thinking about refinancing, keep a close eye on current interest rates. If the rate is lower than it was when you initially took out your auto loan, you may want to refinance to secure a better rate. It doesn’t need to be significantly lower for you to benefit. Even a small difference of one percent could save you hundreds or thousands of dollars.
● Your monthly payments are too high. If you can’t afford your current monthly payments, it’s best to explore how refinancing could make your auto loan more affordable. Remember, even if the interest rate isn’t lower, you may be able to lower your monthly payments by refinancing to extend the length of your loan.
● Your credit score has improved. Your credit score may not be perfect, but if it has improved at all since you initially took out your loan, refinancing might be a good idea. The bigger the improvement, the better the rate you may qualify for if you refinance.
When is the Best Time to Refinance My Auto Loan?
If you’re thinking about refinancing, it’s important to get the timing of your decision right. When is the best time to refinance? The answer to this question may vary on a case-by-case basis. But in general, here’s what you should keep in mind when deciding when to refinance:
● Many lenders won’t refinance your auto loan if the title transfer has not gone through yet, which can take a few months.
● Taking out an auto loan may cause your credit score to temporarily drop. This is because the lender performs a hard inquiry on your credit before processing your loan. If you recently took out your loan, your credit score might be slightly lower than usual, which means it may be harder to get a better interest rate if you refinance. For this reason, you may want to wait a little longer so your credit score can bounce back from the hard inquiry.
● If you have bad credit or have had credit issues in the past, you may want to wait six months to a year before refinancing. Some lenders may want to see if you are capable of making consistent, on-time payments on your existing auto loan before allowing you to take out a new one.
● When you first take out an auto loan, a large portion of your monthly payments go toward interest. But toward the end of your loan, your monthly payments are used primarily to cover the principal, which is the amount you borrowed. Because most of your interest is paid at the beginning, you may not benefit from refinancing unless you have at least one or two years remaining on your auto loan.
What If I Can’t Get Better Terms By Refinancing?
Bad credit may not prevent you from refinancing. However, it may prevent you from securing better terms on your new auto loan. If you’re in this situation, you may want to spend a few months focusing on improving your credit score. Follow these tips:
● Don’t open any new accounts. Every time you apply for a new line of credit, the lender performs a hard inquiry, which can lower your credit score. Plus, opening new accounts can lower the average age of your credit accounts, which also negatively impacts your score.
● Make on-time payments. Your payment history accounts for over one-third of your total credit score. Because of this, the best way to improve your credit score is to make on-time payments on your outstanding debts.
● Check your credit report for errors. If you see an error, contact the credit bureaus to get it removed from your credit report.
● Avoid making large purchases with your credit cards. Try to keep your balances as low as possible. If your credit card balance increases, your credit score could suffer.
Taking this time to work on your credit score may help you qualify for better loan terms through refinancing in the near future.
How to Refinance My Auto Loan With LoanCenter
Don’t let bad credit prevent you from refinancing your auto loan. Follow these steps to refinance your auto loan with LoanCenter:
- Submit your information using the form on our website. Filling out this form will not impact your credit.
- Discuss your options with one of our loan officers. A loan officer will review your information and contact you to tell you more about the loan terms you qualify for through LoanCenter.
- Select your loan. Review your loan options and work with your loan officer to figure out which one is right for your needs.
- Finalize your new loan. You will need to sign and submit paperwork once you choose a new loan. Your loan officer will guide you through this step to ensure they have everything they need to complete the processing of your new loan.
- Enjoy the benefits of refinancing. Your new loan will pay off your existing loan, so you can now start enjoying the many benefits of refinancing.
Don’t wait any longer to secure better auto loan terms. Learn more about your refinancing options by contacting LoanCenter today.