Auto Loan Refinancing: How Does it Work?

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, - March 21, 2024

Taking out a bad credit car loan is a great way to help you improve your credit score over time as long as you manage it properly. Sometimes, as your loan stretches out in time, it can become difficult to manage for various reason such as a change in your finances or an unexpected hardship. If you need to lower your monthly payment and/or want to qualify for a better interest rate, you typically need to refinance the loan.

However, there’s some prep work you need to do when refinancing a car loan, and we’re here to tell you how to set yourself up to do it.

How Auto Loan Refinancing Works?

Refinancing a car loan means applying for another loan on the vehicle you currently have and getting the old one paid off. Your new loan pays off the original one, and usually, the main goal is to get a lower monthly payment. You may qualify for a lower interest rate or a longer loan term (or both) to get a smaller car payment.

Bad credit borrowers commonly seek refinancing, since a lower credit score can lead to a higher-than-average interest rate. After making on-time payments for a while it’s likely your credit score has improved, which could qualify you for lower rates now.

Whether you’re just not happy with your lending institution, need more time to pay off your car, want smaller payments, or just want to save money on your loan overall, refinancing could help if you qualify.

When refinancing, you’re replacing your existing loan with a new one that has a better interest rate or longer term. You should check with your current lender first to see if they’re willing to refinance you, but it's typically done through a new lender. Our trusted partner can help you view and compare refinancing offers online right here.

Can You Refinance a Car Loan?

The most important thing you need to do before you refinance a loan is to get your credit report. Have this on you when you are applying for a new loan. Once you have your credit reports, you'll be aware of what the lender is basing their decision on. If you have a score under 600, it may not be worth it to do the work of applying. You'll need to raise your credit score before you try to refinance.

In order to refinance your current auto loan, you need to make sure at least a year has passed since taking out the original loan. Lenders like to see that you’ve kept up with the monthly payments, and that you’re serious about successfully completing the loan. In addition, your credit score needs to have improved, and, depending on where your credit was, it could take a year or more to build it up to where it needs to be.

When at least one year has passed and you’re considering refinancing, you need to do these five steps, in order:

Check Your Credit

You need to know your credit score and what’s on your credit reports before you talk to a lender about refinancing. If your bank, credit union, or credit card provider doesn’t offer a free FICO credit score check, you can get your FICO score, and your auto-enhanced FICO score, at by paying a small fee. In addition, you’re entitled to a free copy of your credit reports every week from each of the three major credit bureaus – Equifax, TransUnion, and Experian – at Make sure all the information is correct, and dispute any errors to the credit bureaus immediately.

Research Current Interest Rates

The Federal Reserve sets the nation’s overnight bank interest rate – what lenders base their rates on – and it can fluctuate quarterly. Check out the rates current car buyers in your credit score range are getting. This way, you won’t be surprised if a lender offers you an interest rate slightly higher than what you expected. Doing this could also give you a chance to wait and see if interest rates are expected to drop.

Gather Vehicle and Loan Information

Make sure you know your car. This means knowing its vehicle identification number (VIN), make, model, year, and mileage shown on the odometer. You should also research its current market value by visiting vehicle valuation sites such as NADAguides. In addition, make sure you know your current loan’s terms, including the interest rate, length, and monthly payment amount.

Request a Payoff Quote

Once you feel confident about where your credit stands and you’re familiar with the current interest rates, you should request a 10-day payoff quote from your current lender. The payoff amount includes additional interest since your last loan statement, and if there’s a pre-payment penalty (there shouldn’t be). From there, determine the difference between your car’s current market value and the payoff amount. If you owe more than the vehicle’s worth – called negative equity – you need to come up with the difference before you can refinance the loan.

Shop Around

Rate shopping is the best way to find the best refinancing deal. While you can choose to refinance with your current lender, we recommend checking with at least one other one. Keep in mind that different lenders have specific requirements your car must meet. Ask what they are, and make sure your vehicle falls within their guidelines. Generally, lenders don’t refinance cars that are over 10 years old and/or with more than 100,000 miles.

Requirements to Refinance a Car?

You need to be able to qualify to refinance, and each lender has their own requirements that have to be met. The first thing that most lenders look at is your credit score. Good credit is usually a major factor for refinancing. If you originally took out a bad credit car loan, you may still qualify for refinancing if your credit score has improved since it began.

Another factor that determines whether or not you can refinance is your vehicle. Your car has to meet the lender’s age and mileage rules in order to qualify. Finally, the loan amount has to fall within a lender’s acceptable range.

Your eligibility for refinancing varies by lender and state, as well as a few other factors, including:

  • Your loan must be current – You must be up to date on your loan, as this qualification means your payments must be current.
  • Your vehicle must have equity – If you owe more on your loan than the car is worth, which is called having negative equity, you’re going to need to wait to refinance until you have equity in your vehicle.
  • Ensure your car has a clean title – What this means is that you should make sure the vehicle you want to refinance doesn’t have a branded title, such as salvage or rebuilt, and isn’t a commercial car, or fleet vehicle.

Refinancing a Car with Bad Credit

If your credit hasn’t improved much since taking out the initial auto loan, you may be wondering if it’s possible to refinance with bad credit. In some cases, a lender may approve you for refinancing if your credit isn’t in good shape, but you shouldn’t count on it.

In most cases, a lender isn’t going to approve you for refinancing if your credit is poor. The good news is you can take steps toward rebuilding your credit and refinancing a loan down the road.

It’s going to take some time to build up a good credit history, but as long as you keep up with your monthly bills by paying them on time, you should see your score improve. Once some time has passed and your credit score and reports are in better shape, you can consider refinancing your car loan.

Stuck on the Last Step?

If you’ve gone through steps one through four, but don’t know where you should be looking for a lender to refinance, we want to help. Through our partnership with RateGenius, we can help you find a place to refinance your auto loan.

We can also help if you’re simply in need of a bad credit car loan. At CarsDirect, we work with a nationwide network of dealerships that have the lending resources available to handle unique credit situations.

Just fill out our free-of-cost, no-obligation auto loan request form, and we’ll get right to work connecting you to a dealer near you.


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