Whether you’re stuck in a high-interest auto loan and want to save money, or you’re looking to slash your monthly car payment, an auto refinance may be the answer for you. However, if your credit score is less than 700, you may be wondering if you can refinance your auto loan with bad credit.
While there’s no guarantee you’ll be approved for a loan, today’s competitive interest rate environment may work in your favor. Here are a few things to consider when refinancing a car loan with a low credit score.
Order copies of your credit reports (you can get one for free each year from the three credit reporting companies) and review them to make sure everything is accurate. If not, you’ll want to resolve inaccuracies before applying to refinance.
There are many free credit monitoring tools (your credit card company may provide one). According to Credit.org, the credit score ranges break down as follows: 300-550 (poor), 550-620 (subprime), 620-680 (acceptable), 680-740 (good), 740-850 (excellent).
If your credit score has improved or you’ve made a few on-time payments in a row, your lender could be willing to do what it takes to keep your business, including releasing your cosigner and/or refinancing your auto loan.
You should be able to apply for auto refinance loans through several lenders without doing more damage to your score—most credit scoring models count multiple loan inquiries as one if they’re close to one another.
Many lenders will share a credit score range or minimum credit score in their FAQs or elsewhere on their site. If you’re in the subprime or poor credit category, loan options that are clearly marked “bad credit” or “subprime” will be easier to obtain—just watch out for higher than average interest rates and fees.
Remember to compare all the terms and fees, such as prepayment penalties, late fees and closing fees. If you’re refinancing to save money, you may want to choose a loan with a shorter term vs. a longer one, which is typically higher interest but can reduce your monthly payments.
Here are a few reasons to considering refinancing your auto loan:
There are times when refinancing doesn’t make sense. For example, if your car loan is upside down—meaning your vehicle is worth less than what you currently owe—most lenders won’t approve your refinance loan.
Generally speaking, refinancing a car loan shouldn’t affect your credit too much. When you shop around for a loan, lenders will do what’s called a hard pull on your credit. If you apply at multiple places within a 45-day period, credit reporting agencies will count these hard pulls as one instance. If you’re applying for a new refinance loan every couple of months, then that can have a negative impact on your score.
There are many companies (and loan comparison sites) that do a soft pull on your credit, meaning that your credit score won’t be affected. You can get prequalified this way to check out promotional offers and see which lender is offering the lowest rate for you.
When you successfully refinance a loan, your old loan will be considered closed. If you’ve had that loan for a long time, it could affect your credit because some credit scoring models look at the average age of your accounts to determine your score. Your score could decrease slightly depending on any other loans you have, but it should eventually go back up if you’re making payments on time.
It’s not always easy to refinance an auto loan with bad credit history, but it may be possible. If your credit score has improved or rates have dropped, it could be worth the effort. As always, do your research and make sure you understand what you’re getting into before signing the dotted line.
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