We usually only encourage people to refinance their car loan if they can secure significant savings that make the switch worthwhile.
However, if you have bad credit it is unlikely that you can access better rates unless you bring in a co-borrower.
Swapping one high cost car loan for another is rarely the right move unless there are circumstances where it can genuinely remove other pressures.
In this article, we will explore the few reasons why someone should refinance a car loan with bad credit, and how to do it.
We will also explore the few ways to do this AND save money.
Key Takeaways: Bad Credit Refinancing
| Benefits of Refinancing | Refinancing with bad credit is unlikely to save you money, and should only be pursued if you have another reason to do so. |
| Use of a Co-Borrower | A second borrower on the application could strengthen the overall credit assessment and help secure a cheaper loan. |
| Clean Bank Statements | Credit impaired lenders will scrutinise your bank statements. Avoid any high risk activity leading up to your application. E.g. Gambling, BNPL etc. |
Why Refinance with Poor Credit
It is important to acknowledge upfront that any change is most likely going to cost more than your current loan.
As a result, the motivation for doing so must persist in spite of this.
Some reasons to do so may include:
- Extending the loan term to lower the monthly payment.
- Refinancing the balloon payment of your existing loan.
In both of these scenarios you will be extending the loan term. This will lead to higher costs in interest and fees over time.
If there is permanent financial pressure that will be resolved by this kind of refinance then it may be the best option.
It is critical that you prevent any future default so that you can also repair the current state of your credit report.
When the financial pressure is only temporary, you will always be better off discussing this with your current lender.
You can apply for hardship consideration, or a temporary change to your repayment terms.
How to Find The Best Refinance Deal
Once you have decided to proceed there are two objectives you need to pursue as part of your search:
- Find the cheapest deal to minimise the cost.
- Avoid unnecessary enquiries on your credit file, which could further hurt your credit score.
Multiple applications harm your credit score, but the problem with having bad credit is your choice of lender is a bit murky.
This is where it is critical to use a broker who specialises in bad credit car finance.
They will conduct a preliminary assessment that looks at your credit file without leaving a mark. This is known as a soft credit check.
Once they determine what lenders will consider your application, and where the best rates are for your situation, only then a formal application will be submitted.
Costs to Expect
The reason we only encourage refinancing when there are significant savings on offer, is because of the fees associated with switching.
It can be a setback at first, but over the life of the loan you end up well ahead or we would not proceed with the loan.
If you have bad credit, then this decision framework is largely off the table unless you are on the improve (in which case just wait a few months to access better deals).
The costs to consider are:
- Interest rate: Will this increase or decrease in the new loan?
- Exit Fee: If you current loan is early in the total repayment term you may be liable for a fee to break the contract. So check this first!
- Establishment Fee: This could also include an additional risk fee if your credit report is in poor shape.
How to Get a Better Car Loan Deal with Bad Credit
It may be possible to get a better deal if you can find ways to lower the perceived risk to the lender.
The following options could help you achieve meaningful savings by refinancing leaving you financially better off.
Add a Co-Borrower
Adding a co-borrower with stable income and a clean credit history strengthens your application significantly.
Before committing, you should discuss and agree on each of the following points with your co-borrower:
- Who is responsible for making payments.
- The plan if a payment is missed.
- How the co-borrower can eventually be removed from the loan.
Improves Your Loan-to-Value Ratio
If you have paid down the loan significantly and the loan value is much less than the value of the secured asset you may be able to get more favourable terms from a lender.
While this may improve your chances of getting approved, and potentially avoiding a risk fee, it may not impact your interest rate much.
Improve Your Chances of Approval With Bad Credit
A lender who is considering a bad credit application is going to want to scrutinise your bank statements.
This is done electronically and looks for clues that indicate how financially responsible you are today.
This can be a big plus for those who are genuinely improving their budgeting and behaviours.
Here is a high level checklist of high-risk transactions that will hurt your application.
For the full details, check out our complete guide to bad credit car finance.
- All other loans must be up to date.
- Do not use wage advance products.
- Do not use Buy Now, Pay Later products.
- Ensure there are no reversed payments.
- Preserve a reasonable cash balance throughout your pay cycle.
- Ensure no gambling transactions are evident.
Frequently Asked Questions
What credit score do you need to refinance a car loan?
Some non-bank lenders do not have a minimum score, and use this as one of many factors weighted in their decision process. This category of lender will require bank statements when assessing your refinance application.
Does refinancing hurt your credit score?
Getting pre-qualified with Gusto Finance does not affect your score. A formal application triggers a hard enquiry, which can cause a small, temporary dip. However, making consistent, on-time payments on the new loan will improve your credit history over the long term.
Can I refinance if I have negative equity and bad credit?
Each lender has a different loan to value ratio cap. If you are within this, and meet other credit criteria, you can refinance with that lender. This will be assessed as part of your preliminary assessment.
Your Refinance Action Plan
Carefully assess whether you should refinance your car loan. If there are alternative solutions, like temporary hardship assistance, you should explore this first.
If a refinance is the best solution for you then you need to seek out the best deal possible.
A specialist broker can save you time and avoids unnecessary credit hits by assessing your options first.
Click below to request a free assessment of your circumstances to find a suitable lender for you.
