Can You Refinance a Car Loan With Bad Credit?

It is often possible to refinance a car loan even with bad credit. While a low credit score presents challenges, many lenders specialize in working with borrowers in such situations. This article outlines the key factors lenders evaluate when considering a car loan refinance.

Key Eligibility Factors

Lenders assess several factors when considering a car loan refinance, especially for individuals with lower credit scores. Your credit score indicates creditworthiness; a FICO score below 580 is generally “poor,” but some lenders approve applications with scores as low as 460. Borrowers with scores in the 300-500 range, termed “deep subprime,” typically face significantly higher interest rates, averaging around 21.58% for used cars.

Lenders also examine your debt-to-income (DTI) ratio, which is the percentage of your gross monthly income dedicated to debt payments. Lenders prefer a DTI ratio of no more than 45%-50% after accounting for the new car loan payment. A lower DTI indicates sufficient income to manage new monthly payments, reducing lender risk. A high DTI may be a hurdle to refinancing until existing debt is reduced.

The loan-to-value (LTV) ratio compares the amount owed on your car loan to the vehicle’s current market value. An LTV over 100% means you owe more than the car is worth, known as being “underwater” or having negative equity. While some lenders approve refinancing with an LTV up to 125% or 130%, a lower LTV is generally preferred as it indicates less risk and can lead to lower interest rates. Lenders may require a lower LTV for bad credit borrowers to provide more equity in case of repossession.

Your vehicle’s age and mileage also influence refinance eligibility. Most lenders require vehicles to be under 10 years old or have less than 100,000 to 150,000 miles. Older or high-mileage vehicles are higher risk because their value depreciates rapidly and they may be less reliable, impacting the lender’s ability to recover funds if the loan defaults. A newer, well-maintained vehicle with lower mileage can improve approval chances, especially with a lower credit score.

Your payment history on your current car loan is important, even with a low credit score. Consistently making on-time payments demonstrates financial responsibility and can improve your standing with lenders. Lenders view a strong track record of timely payments favorably, potentially offsetting concerns related to a lower credit score. Conversely, late payments, especially those over 30 days past due, can negatively impact your credit history and reduce your likelihood of approval.