Smart Money

Guide to Auto Refinancing



September 15, 2023

Refinancing a Car Loan with Bad Credit

As someone with bad credit you know you can face higher interest rates and less favorable loan terms compared to prime borrowers when it comes to getting a car loan. However, refinancing a car loan can be a viable option to save you money or reduce your monthly payments. Here's what you need to know about auto refinance loans.


What is an Auto Refinance Loan?

Refinancing your auto loan means replacing your current loan with a new one from a different lender. The new loan usually has different terms, such as a lower interest rate or an extended loan duration. The primary reasons individuals choose to refinance their auto loans include:

1. Lower Interest Rates: If a person's credit score has improved since they took out the original loan, or if market rates have fallen, they might qualify for a lower interest rate. A reduced rate can lead to significant savings over the life of the loan.

2. Change Monthly Payments: Refinancing can allow a borrower to extend the term of the loan. This can reduce the monthly payment, making it more manageable, but it may increase the total interest paid over the life of the loan.

3. Adjust Loan Term: A borrower might want to pay off the loan faster and save on interest. Refinancing to a shorter term can help achieve this, though it might increase monthly payments.

4. Change Lenders: A borrower might not be happy with their current lender's service or might benefit from perks offered by another lender.

5. Equity Access: If the vehicle has equity (its market value is higher than the outstanding loan balance), some refinancing options might allow the owner to cash out this equity.


How Does Refinancing Work?

1. Assessment: First, evaluate your current loan terms and see if there's potential for improvement. 

2. Research Lenders: Look for lenders who offer refinancing to subprime borrowers.

3. Apply: Submit your application, which will include details of your current loan and personal financial information.

4. Approval: If approved, the new lender will pay off your old loan, and you'll start making payments to them under the new terms.

5. Transfer: Once the previous loan is paid off, the car's title will be transferred to the new lender.


Where to Get a Refinance Loan?

1. Traditional Banks: Some banks may offer refinancing even to subprime borrowers. 

2. Credit Unions: Often, they offer more favorable rates and are more willing to work with those with lower credit scores.

3. Online Lenders: Many online platforms specialize in refinancing options for those with bad credit.

4. Specialized Subprime Lenders: Some lenders specifically cater to the subprime market. However, be wary of terms that may not be in your best interest.


How Much Does Refinancing Cost?

1. Closing Costs: Some lenders might charge fees for processing the refinance.

2. Prepayment Penalties: Check your current loan terms; some loans have penalties for paying them off early.

3. Extended Loan Terms: While a longer loan duration might lower monthly payments, it could result in more interest paid over time.

4. Change in Interest Rate: Ideally, refinancing will reduce your interest rate. However, ensure that the new rate offered makes refinancing worthwhile.

Key Considerations for Subprime Borrowers

1. Credit Score: Before applying, check your credit score. Even small improvements can impact the terms you're offered.

2. Current Loan Terms: Understand your current loan's interest rate, remaining balance, and any potential penalties.

3. Loan-to-Value (LTV) Ratio: This ratio determines how much you owe on your car versus its current value. A lower LTV can result in better refinancing terms.

4. Employment History: Lenders may want to see steady employment to ensure you have a consistent income to make payments.

5. Other Debts: Lenders will look at your overall debt profile, so be aware of how other debts might impact your refinancing options.

6. Read the Fine Print: Always understand all terms before signing any agreement. Look out for hidden fees or conditions.


Benefits and Risks


1. Reduced monthly payments

2. Potential for a lower interest rate

3. Opportunity to change loan duration 


1. Might end up paying more in the long run if terms aren't favorable

2. Possible fees and penalties

3. Risk of falling into a cycle of debt if not careful



Auto loan refinancing can be a useful tool for subprime borrowers to make their loans more manageable or save on interest. It's essential, however, to approach the process with caution and do thorough research to ensure that the new loan terms are beneficial in the long run.


Disclaimer: Yendo is not a provider of financial advice. The material presented on this page constitutes general consumer information and should not be regarded as legal, financial, or regulatory guidance. While this content may contain references to third-party resources or materials, Yendo does not guarantee the accuracy or endorse these external sources.