Can I Refinance My Car Loan if I’m Behind on Payments?

Refinancing a car loan involves replacing an existing loan with a new one, often to secure more favorable terms. This process can be appealing when a borrower faces financial challenges, such as falling behind on payments, as it may offer a path to a more manageable financial situation. This guide provides an overview of how car loan refinancing works, how delinquency impacts eligibility, and what alternative actions are available.

Navigating Refinance Eligibility

Refinancing a car loan involves a lender evaluating several factors for eligibility, and being behind on payments significantly impacts this assessment. Lenders scrutinize a borrower’s credit history, including their credit score, which is directly affected by late payments. A payment reported 30 days or more past due can cause a notable drop in a credit score, and multiple delinquencies can severely impair it, signaling increased risk to potential lenders.

Beyond the credit score, lenders assess the payment history of the existing loan, noting the frequency and severity of any missed payments. Even if a borrower catches up on past-due amounts, the record of delinquency remains on their credit report for up to seven years. The debt-to-income (DTI) ratio, which compares monthly debt payments to gross monthly income, is another metric. Lenders generally prefer a DTI ratio around 50% to 60% to ensure a borrower has sufficient income to cover new obligations.

The vehicle’s characteristics also play a role in refinance eligibility. The loan-to-value (LTV) ratio, which compares the outstanding loan balance to the car’s market value, is important. Lenders are less inclined to approve refinancing if the borrower has negative equity, meaning they owe more than the car is worth. Additionally, the vehicle’s age and mileage can influence eligibility, as some lenders have restrictions, such as not refinancing cars older than 10 years or with over 100,000 to 125,000 miles. While refinancing can be challenging when behind on payments, it may still be possible if the borrower can bring the account current and demonstrate an improved overall financial picture.

Gathering Information for Refinancing

Gathering specific financial and vehicle-related documents is required for a car loan refinance application. Borrowers will need proof of income, such as recent pay stubs covering the last 30 to 60 days, bank statements, or tax returns, especially for self-employed individuals. Proof of residency, such as a recent utility bill or mortgage statement, may also be requested.

Details about the current car loan are essential for the application process. This includes the loan account number, the estimated payoff amount, the remaining term of the loan, and the current interest rate. Lenders will also require comprehensive vehicle information, such as the Vehicle Identification Number (VIN), make, model, year, current mileage, and proof of insurance. Obtaining a 10-day payoff statement from the current lender is also a common requirement.

Before applying, borrowers should review their credit report and credit score. This allows them to understand their current credit standing, identify any inaccuracies, and assess how late payments have impacted their score. Checking one’s own credit report does not negatively affect the score, but it provides valuable insight into the rates and terms they might expect. Organizing these documents in advance can help streamline the application process.

Submitting Your Refinance Application

After gathering all necessary documents, submit the refinance application to prospective lenders. Borrowers can seek out various types of lenders, including traditional banks, credit unions, and online lenders, many offering specialized auto refinancing services. Some lenders, known as subprime lenders, specialize in working with individuals who have a less-than-perfect credit history, though their terms may include higher interest rates.

The application process typically involves completing an online form or submitting documents in person at a branch. During the review, the lender performs a credit check, which results in a hard inquiry on the credit report, potentially causing a temporary slight dip in the credit score. Lenders may also conduct a vehicle appraisal to determine the car’s current market value, which is crucial for assessing the loan-to-value ratio.

Following the review, the lender communicates the outcome, which could be a conditional approval or a denial. If approved, the borrower receives an offer outlining the new loan terms, including the interest rate, monthly payment, and loan duration. Upon acceptance, the borrower signs the new loan documents, and the new lender facilitates the payoff of the original loan, often handling the transfer of the vehicle title.

Alternative Actions for Loan Delinquency

When refinancing a car loan is unfeasible, especially due to payment delinquency, exploring alternative actions can help manage financial strain and avoid severe consequences. A primary step involves contacting the current lender to discuss options before the situation escalates. Lenders may be willing to work with borrowers to prevent a full default, as repossessing a vehicle can be costly and undesirable for them.

One common option is a loan modification, where the lender agrees to change the terms of the existing loan. This could involve lowering the interest rate, extending the loan term to reduce monthly payments, or temporarily deferring payments, allowing the borrower time to stabilize their finances. Another possibility is a temporary payment plan, where the lender might accept a reduced payment for a short period or allow a missed payment to be added to the end of the loan term.

Voluntary surrender of the vehicle is another option, where the borrower returns the car to the lender. While this prevents a formal repossession, it is still reported as a negative mark on the credit report and can remain for up to seven years. The borrower might still owe a “deficiency balance” if the sale price of the vehicle does not cover the outstanding loan amount and associated fees.

Selling the vehicle privately or trading it in at a dealership can also be a way to address the loan. If the car’s value exceeds the loan balance, the proceeds can pay off the debt, potentially leaving some funds. If the car is worth less than the loan, the borrower would need to cover the difference, known as negative equity, to complete the sale. Seeking advice from a non-profit credit counseling agency can provide impartial guidance and help develop a comprehensive financial plan, potentially including debt management strategies.