Can You Refinance a Car Loan While Being Behind on Payments?

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Even with poor credit.


Contributing Writer

David Topham covers the automotive and auto finance industries as the Content Manager of Auto Credit Express who also contributes to CarsDirect. He was born and raised in Michigan and is a graduate of Michigan State University.

, Contributing Writer - July 20, 2018

Refinancing a car loan allows you to take out a new loan on the same vehicle in order to get different terms. The most common reason for auto refinancing is to get a lower interest rate, but it can also be used to extend the loan term for a smaller monthly payment. For consumers struggling to keep up with their car payment, refinancing is one possibility to explore. However, if you're already behind on payments, it's typically not possible to qualify for refinancing.

Refinancing an Auto Loan with Late Payments

When you refinance an auto loan, it basically means you replace your current loan with a new one with different terms, usually with a different lender. As a result, this also means that you have to meet the standards of the new lender in order to qualify.

While not universal, these are some of the typical auto loan refinancing requirements you have to meet in order to qualify:

  • Current on Payments – In almost all cases, you can't be behind on payments when you're trying to refinance. Naturally, a new lender will be concerned if this is the case, and less likely to approve you as a result.
  • Good Credit – You also need to have good credit in order to qualify for refinancing. Although, if you took out your original loan when your credit was poor, lenders may approve you as long as your credit has improved enough in the meantime. Typically, this is only possible after two to three years of on-time payments.
  • No Negative Equity – Another thing to watch out for is the equity situation in your vehicle. You won't be able to refinance if you're upside down or underwater – you can’t owe more on your loan than the car is worth.
  • Age and Mileage – Lenders have rules about the maximum age and mileage of a vehicle they'll allow to be refinanced, so your car has to fall within their acceptable limits.
  • Loan Amount – At the same time, lenders may also have a minimum and maximum loan amount they'll refinance, so the amount of the loan can impact your ability to qualify.

Refinance a Car with Bad Credit while Behind on Payments

While it’s hard to qualify to refinance a car if you’re behind on payments, it becomes even more difficult if you’re dealing with bad credit. As mentioned above, having good credit is almost always a requirement to get approved.

The reason bad credit can stop you from qualifying for refinancing is that many lenders aren't willing to work with borrowers with imperfect credit. Many banks, credit unions, and major online lenders have a strict credit score requirement for all types of financing, including auto loan refinancing.

Even if you were to find a lender that's willing to work through poor credit, the fact that you're behind on your payments will likely prevent you from getting approved.

Options if You're Behind on Car Payments and Have Bad Credit

If you're struggling to pay on your car loan, there are few options you should explore:

  • Talk to Your Lender – Before you miss a payment, you need to get on the phone with the lender and discuss your situation. If the financial bind is temporary, they may be willing to work with you to stop you from falling behind. They may let you refinance if you meet their requirements, or they could let you skip a month or two and tack the payments onto the end of the loan.
  • Focus on Getting Caught Up – If you're already late on your payments, you can work to catch up. Take a hard look at your budget and figure out ways to cut down expenses in other areas so you can catch up as soon as possible.
  • Sell or Trade in – You can also look into selling your car and using the money to get out from underneath your loan. You may be able to get more for it through a private sale than you would trading it in. If you need to have a car, you can try to trade it in for something more affordable.
  • Find Someone to Assume your Payments/Loan – Another possibility is finding somebody to take over your payments – if the lender allows this. This type of transfer means the other person replaces you on the existing loan and take ownership the vehicle.

If you can't make any of these options work, it might be time to consider voluntarily surrendering your car if your situation isn't going to get better. While a voluntary repossession still drops your credit score, you avoid the fees that come when the lender takes action to take back the car on their own.

The Bottom Line

It's typically very hard to qualify to refinance a car with bad credit and late payments. The best course of action is to talk to your lender before you get behind on payments, but if it's too late, you may have to explore more extreme measures like doing what you can to get caught up, selling or trading in the car, or getting somebody to assume the loan.

If you're dealing with bad credit and need a dealer to help you out, CarsDirect can help you find one. We match car buyers to local dealerships that know how to help people in unique credit situations. Start the process today by completing our auto loan request form online, and we'll get to work for you.

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, Contributing Writer

David Topham covers the automotive and auto finance industries as the Content Manager of Auto Credit Express who also contributes to CarsDirect. He was born and raised in Michigan and is a graduate of Michigan State University.

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