When Can I Refinance a Bad Credit Auto Loan?

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


, - August 5, 2019

If you took out a bad credit car loan and want to replace it with a better, more affordable loan, you need to refinance it. When you can refinance a bad credit auto loan depends on a few different factors, including how long it’s been since you took out the original loan and your vehicle, among other things.

The Right Time to Refinance with Bad Credit

The main goal of refinancing a car loan is to make your monthly payment more affordable. If you’re wondering when the right time to refinance would be, ideally, lenders like to see that at least a year has passed and that your credit score has improved since you took out the loan. If both of these things can be checked off, you’re usually good to go.

Other times when refinancing may be right include these two situations:

  • Your financial status changed – If you lost a job, or your income situation changed for the worse, you might be able to refinance and extend the loan term to lower the monthly payment. Unfortunately, you won’t save money on the overall cost of the loan in this case, since the longer loan means you end up paying more in interest charges. But doing this makes the monthly payment more affordable. This is a good temporary fix when you need to get your finances back on track; once you do, you can try paying more each month, which pays the loan off more quickly.
  • You can qualify for a lower rate – As we mentioned earlier, if at least a year has passed and your credit score has improved, you may be able to refinance and qualify for a lower interest rate. This is the ideal refinancing option, especially if you took out a bad credit auto loan, since you save money in interest charges and reduce your monthly payment.

The Wrong Time to Refinance with Bad Credit

What about the wrong times to refinance? Refinancing isn’t the right route to go for every borrower, and some situations can even prevent you from refinancing altogether. These include when:

  • Your car is old – Lenders have specific age and mileage restrictions on vehicles they’re willing to refinance. If your car is too old or has too many miles according to the lender’s standards, you can’t refinance it.
  • You have negative equity – If you owe more money on the loan than the vehicle’s actual cash value, you have negative equity. Lenders typically aren’t going to refinance a car with negative equity, but if they do, they're probably going to ask you to pay the difference up-front between the loan balance and the vehicle's value. If you can’t pay the difference, then your best bet is to wait until you have equity.
  • You have pre-payment penalties – Rarely, loan contracts come with pre-payment penalties. Depending on the amount, refinancing may not make sense if it cancels out the potential savings that come with refinancing.

The Bottom Line

Refinancing is a great way to save money on a bad credit auto loan. However, not everyone is able to refinance, and there are right and wrong times to do it.

If you need assistance with refinancing, CarsDirect can help. If you’re just looking for a bad credit auto loan, we can help with that, as well.

At CarsDirect, we specialize in matching credit-challenged consumers to the right dealerships so they can get the financing they need. Getting started is simple! Just fill out our free car loan request form, and we’ll get right to work connecting you.

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


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