Looking to refinance? Car loan payments can easily overwhelm your monthly budget, and as we head into the new year you may be looking to give your finances a tune-up. But what if your credit score is less than ideal? Is refinancing your car loan even an option? At Auto Approve, we’re here to help and answer all of your questions about refinancing with bad credit and help you get the best refinance rates possible.
What's Considered A Good or Bad Credit Score?
What do we mean by “bad credit”, and how important is it in terms of refinance? Car, SUV, and truck refinance are more beneficial when you have an increased credit score. Before we dive into refinancing, let’s look at how credit scores are calculated and what is considered a good or bad credit score.
Your Credit Score
Credit scores are used by lenders to determine how likely a person is to pay back their debts.
These scores are calculated based on five metrics:
- Payment History (Your history of on-time, full payments)
- Amounts Owed (The amount of money you owe vs how much credit you have available to you)
- Credit History Length (The age of your credit accounts)
- Credit Mix (The diversity or assortment of your debts)
- New Credit (The number of new accounts you have opened plus the amount of hard inquiries you have)
All of these metrics are important to your credit score, but your payment history and your amounts owed weigh the heaviest and matter the most to your credit score.
What’s Considered a Bad Credit Score
Credit scores range from 350 to 850 and fall in the following brackets:
- 800 to 850: Excellent credit
- 740 to 799: Very good credit
- 670 to 739: Good credit
- 580 to 669: Fair credit
- 300 to 579: Poor credit
If you have fair credit or poor credit, you are considered to be less desirable (this is considered “bad credit”). People with the highest credit scores (740 and above, typically) will more easily be approved for loans and credit applications, and will typically get the best interest rates and APRs.
Why Is a Good Credit Score Important
Having a good credit score is vital for a number of reasons. Having a good credit score shows lenders that you are reliable and pay back your debts in a timely manner. A good credit score will give you:
- Lower interest rates on credit cards and loans
- Better chance for credit card and loan approval
- Higher credit limits
- Better insurance rates
- Easier approval for rentals
- More negotiating power for loans and accounts
Working to secure a good credit score will pay off a lot in the long run, especially when it comes to refinance. Car, SUV, and truck refinancing can be incredibly beneficial if your credit score has increased.
How Refinancing Can Affect Your Credit Score
When you refinance your car, it will affect two of your credit categories: Credit History Length and New Credit. Since you are closing one account (the old loan which you are paying off) and opening a new one, it will reduce the score of your credit history. But credit history only makes up for 15% of your score and as the account ages, this number will improve.
Your New Credit will also take a hit, from the new account you are opening plus the hard inquiries that are made on your credit. Be sure to apply to all of your lenders within a fourteen day period–this is the grace period that credit bureaus allow for inquiries. This means that all inquiries within that timeframe will count as one hard inquiry against your credit. Hard inquiries only stay on your credit report for a year, so it is only a temporary ding. New Credit only accounts for 10% of your credit score, so it is not a major component.
Is it Possible to Refinance a Car Loan When You Have Bad Credit?
While it always depends on your specific situation, it may be possible to refinance car loans if your credit is less than stellar. That said, it may make more sense to try to improve your credit before looking to refinance. If you are considering car refinance, think about what your goal is and how you can best achieve it.
Is the goal of refinancing to make lower monthly payments? Is it to save money overall with a lower APR? Do you need to add or remove a co-borrower? If your credit has not improved since your initial loan, you may not be eligible for a lower APR. But if your ultimate goal is to reduce your monthly payments, changing the terms of your financing might still be an option.
By extending the length of your loan, you will stretch out the payments over a longer period of time, therefore reducing your monthly payments.
If your goal is to add or remove a co-borrower, you will need to refinance. You cannot make big changes like that to your loan, so it is necessary to refinance your car loan. Adding a co-borrower with good credit may qualify you for a better rate when you do refinance.
The reality is, most lenders won't refinance with someone who has truly bad credit, so it's usually best to work on your personal finances and get your credit score up before applying. At Auto Approve, we can't offer many services for those with bad credit, but if you're on the fence and want to know if you'd be eligible for a better rate, you can always get a quote to find out. Getting a quote is free and doesn't require a credit check.
How Do You Improve Your Credit to Refinance?
In most cases, it will make sense to work on improving your credit before refinancing. Car refinance companies will be able to offer you better rates if your credit score has increased since your initial financing. As we mentioned before, people with the highest credit scores will more easily be approved for loans and credit applications, and will typically get the best interest rates and APRs. If you are interested in improving your credit score, try some of our tips below.
Check Your Credit Report
When was the last time you checked your credit report? You should aim to check your credit report three times per year. You are allowed to check for free once a year at each of the three major credit reporting agencies, Equifax, Experian, and TransUnion. Be sure to take advantage of this and stay on top of your credit.
When you get your report, review it thoroughly for errors or mistakes. There could be incorrect missed payments or other discrepancies that may be unfairly dragging down your credit. If you notice an error, report it immediately. The agencies have 30 days to look into your claim, so give yourself some time.
Finding and correcting errors in your credit report may instantly improve your credit score.
Work on Making Consistent Payments
The most influential and important part of your credit score is your payment history. Your payment history makes up 35% of your credit score. Do you always make your payments on time, or do they tend to be late? Are your payments full, or do they come up a bit short every now and then? Commit to being consistent with your payments and your score will increase. Cut back on eating out or think about canceling some unnecessary subscriptions to free up some room in your monthly budget. Six to eight months of consistency is usually enough to make a noticeable difference.
Pay Down Existing Debt
Another key factor of your credit score is your amount owed, which makes up 30% of your credit score. This is also referred to as your credit utilization ratio (the amount of money you owe in relation to how much credit you have available to you). Try to pay a little extra every month (or a lot extra, if you are able). This extra money will go towards your principal and save you a good amount on interest payments. If you are able to pay this debt down through budgeting, it can greatly help your credit score.
Avoid Opening New Lines of Credit
Resist any offers to open a new store credit card or another account. While these new credit lines don’t make huge impacts on your score, they can drag you down by ten or twenty points. That could be the difference between a good APR and a great APR.
What To Do When Your Credit Has Improved
Once your credit score has improved, you will have a much better chance of securing better terms for your refinance. Contact multiple credit unions, traditional banks, and online lenders to start getting quotes and rates. You should aim to apply to 3-5 lenders to get some competitive rates. You can also look into car refinance companies that specialize in auto refinancing. The key to getting a good rate is shopping around.
Be sure to apply to all of your lenders in the same fourteen day window. This will ensure that all of your hard inquiries will count as one hit on your credit report. At Auto Approve, we take care of this legwork for you. We know which lenders to reach out to and can handle the tedious paperwork so you don’t have to.
While it may be possible to refinance a car with bad credit, it's usually more beneficial to work on improving your credit score beforehand to secure better terms.
Working to get a healthy credit score is beneficial in a lot of ways and can help you to refinance and save money. At Auto Approve, we are here to help! Once your credit it in a good place, we can guide you through the process and handle the legwork so you don’t have to. And if you're not sure whether or not you're ready to refinance, getting a quote to see your options is free. So don’t wait to find out if you can start saving money!