How to refinance an auto loan with bad credit

If you’ve purchased a car in the past year or two, you might be wondering whether there’s a way to save on your auto loan. After your rent or mortgage, your car payment could be one of your largest monthly expenses.

According to Edmunds, as of early 2025, the average used vehicle loan came with a $550 monthly payment and an 11.3% annual percentage rate (APR). The average new vehicle loan came with a whopping $741 monthly payment and an APR of 7.1%.

The best way to lower your transportation costs is to pay off your car-related debt as soon as possible. However, if you can’t yet afford to own your vehicle outright, you may want to consider refinancing your auto loan to improve your financial situation.

Even if your credit score isn’t perfect, refinancing may still be possible. In this guide, we’ll walk you through how to refinance an auto loan with bad credit, helping you decide if it’s the right move for your situation.

Can you refinance an auto loan with bad credit?

Yes, it is possible to refinance an auto loan even if your credit isn’t perfect — but there are some important things to know. Lenders who specialize in working with borrowers with lower credit scores or blemished credit histories may be willing to refinance your loan.

That said, refinancing with a poor credit score can be challenging —  if your score is under 580 (which is considered poor), you may struggle to refinance your debt. Based on the Fair Isaac Corporation (FICO) credit scoring model, you have fair credit if your score is between 580 and 669. 

You may also be unable to refinance your vehicle loan if you’re behind on your payments, owe more than the car is worth, or have a loan balance of less than a few thousand dollars.

When should you refinance an auto loan?

There are a few situations when refinancing your auto loan may make sense, such as:

• Your credit score has improved. Your new credit standing may help you qualify for a lower interest rate.
• Interest rates have decreased. A lower rate could help you save money over the life of the loan. For example, the interest rate on a new car with a five-year loan in August 2025 was 7.64% – down roughly 0.75% from August 2024.
• You want to reduce your car payments. If you refinance to a longer term, your monthly bill may be lower because you’ll spread out the payments over more time. However, you may pay more in interest if you carry the loan to term.
• You want to pay off your loan faster. Refinancing to a shorter term can help you get out of debt sooner, but doing so can put pressure on your budget as your monthly payments will likely be higher.
• The car is holding its value. Your vehicle is collateral in case you default on your debt, so your lender wants to make sure it’s worth at least what you’re going to borrow when you refinance.

Bottom line: Refinancing your auto loan could be a wise financial decision if you can save money on interest charges or make your monthly bill more affordable.

How to refinance an auto loan with bad credit

Here’s a step-by-step process to refinance your auto loan with bad credit:

1. Review your credit report and dispute any errors you find. Getting mistakes removed from your report could lead to a higher credit score. You can get your report for free every year from the three major credit bureaus.
2. Try to increase your credit score before applying for your refinance loan. Reducing your debt balances and refraining from opening new credit card accounts may help.
3. Continue paying your current auto loan as agreed. If you fall behind on your payments, you likely won’t be eligible to refinance the debt. Plus, missing payments will significantly damage your credit score.
4. Consider getting a co-signer. A co-signer with good credit can help you qualify for a car refinance loan with a lower interest rate. Just make sure you can afford the new payment on your own so you don’t have to rely on their financial support.
5. Pre-qualify for your new loan, if possible. Going through the pre-qualification process will help you see what options you’ll likely get approved for. Plus, pre-qualification typically results in a soft credit check, which doesn’t hurt your score.
6. Compare several loan options. Be sure to pay attention to the term, interest rate/APR, and fees. FICO will view multiple hard inquiries for the same type of financing as one inquiry if they’re made within 45 days, helping to preserve your credit score. (VantageScore only gives you a 14-day window to shop around.)
7. Gather the information and documentation you’ll need. Generally, you’ll need basic contact details, your driver’s license, the car registration in your name, and proof of income, such as a paystub or tax return. 
8. Submit your application. Depending on the lender you choose, you may be able to apply in person, over the phone, or online. Be sure to respond quickly if the lender asks you for additional information.
9. Make on-time payments on the new loan. Consider setting up autopay to ensure you never forget to pay your bill.

Pro Tip: Your current lender may be willing to refinance your loan if you’ve been a responsible borrower and your credit score has improved. It’s worth asking. Just make sure you won’t be slapped with a pre-payment penalty!

Alternatives & tools to refinance an auto loan 

Refinancing with a traditional auto loan

A traditional auto loan refinance replaces your existing car loan with a new one, usually from a bank, credit union, or online lender. The new loan may have a lower interest rate, a longer or shorter term, or both.

When it works best:

• Interest rates have dropped since you took out your original loan.
• Your credit score has improved, giving you access to better rates.
• You want to reduce your monthly payments or pay off your loan faster.

What to watch out for:

• Extending your loan term may lower payments but increase the total interest paid.
• Some lenders charge refinancing fees or require an appraisal.
• You may not qualify if your credit score is very low or your car is “upside down” on the loan.

Using a personal loan

It’s generally better to finance (or refinance) your vehicle with a car loan than a personal loan because car loans tend to have lower interest rates than personal loans – especially if you have subprime credit. However, a personal loan has one major advantage over a car loan: your vehicle generally won’t be collateral for the debt. That means your car won’t get repossessed if you stop paying on the loan. 

When it works best:

• Your auto loan interest rate is high, and you can secure a lower personal loan rate.
• You want to consolidate multiple debts, including your car loan, into a single payment.

What to watch out for:

• Personal loan rates for borrowers with lower credit scores may be higher than auto refinance rates.
• Loan terms are often shorter than auto loans, which can lead to higher monthly payments
• Missing payments could negatively impact your credit score.

Lender negotiation

You may be able to negotiate directly with your current lender to modify your loan. Options could include extending the term, lowering your interest rate, or deferring payments temporarily.

When it works best:

• You have a strong payment history with your lender.
• You need a short-term adjustment to improve cash flow.

What to watch out for:

• Lenders aren’t obligated to lower rates or extend terms.
• Negotiating may require a fee or additional documentation.
• Some modifications could increase the total interest paid over the life of the loan.

Using home equity 

Homeowners have several ways to tap into their home equity to refinance an auto loan:

• A home equity loan. You receive the money in a lump sum and make fixed payments (thanks to a fixed interest rate) throughout the life of the debt. 
• A home equity line of credit (HELOC). You use it like a credit card, only having to repay what you spend (at a variable interest rate). A HELOC has two distinct phases: the draw period, when you can borrow and only need to pay the interest charges, and the repayment period, when you can no longer borrow and need to make full principal and interest payments.
• A home equity investment (HEI). You receive a lump sum in exchange for a portion of your home’s future appreciation. There are no monthly payments. You settle the investment later—typically when you sell your home, refinance, or use another source of funds anytime within a flexible 30-year term—by paying back the original amount plus a share of the change in your home’s value. HEIs are typically easier to qualify for than home equity loans or HELOCs, so having bad credit may not be a barrier to securing funding.

When it works best:

• You own your home and have substantial equity.
• You want a lower interest rate than typical auto loan or personal loan rates.
• You need flexibility in repayment or want to avoid high monthly payments (HEI).

What to watch out for:

• Your home is used as collateral for loans, meaning missed payments could put your home at risk.

Leveraging your 401(k)

If you’ve been saving for retirement, you may be tempted to take a loan from your 401(k) to refinance your auto debt. You repay the loan with interest back into your account, usually through payroll deductions. 

When it works best:

• You need funds quickly and have a repayment plan in place.
• You want to avoid high-interest loans or refinancing fees.

What to watch out for:

• Borrowing from your 401(k) reduces your retirement savings and potential growth.
• If you leave your job, the loan may become due immediately.
• Failing to repay the loan can trigger taxes and penalties.

Frequently asked questions

How long do I need to wait before refinancing my auto loan?

You need to wait at least two or three months after getting your original auto loan before you can refinance it. That’s because it takes that long for the title, registration, and loan paperwork to get fully processed through all the applicable systems.

You might want to wait a little longer, though —say, at least six months. If you postpone until then, your credit score will have had a chance to improve, increasing your odds of securing a better loan through refinancing.

How can I increase my chances of approval with bad credit?

The best thing you can do if you want to refinance your auto loan is to improve your credit. Pay all your bills on time, keep your revolving balances low, and avoid opening too many new accounts. Unfortunately, though, this process can take a long time to really pay off.

If you can’t wait to see results, consider asking someone you trust with good credit to co-sign your new auto loan. You’ll be more likely to qualify for financing with a favorable interest rate. However, be sure to pay your bill as agreed. Otherwise, your co-signer’s credit will get damaged – as will your relationship with them.

What are the downsides of refinancing with bad credit?

The biggest downside to refinancing your auto loan with bad credit is that you likely won’t qualify for a low interest rate. That means borrowing money to have a car will still be expensive.

However, if rates have decreased and your credit has improved since you took out your original loan, you may be able to save some money over the life of the debt. Plus, if you need to reduce your monthly payment to add wiggle room to your budget, refinancing to a longer term with a similar or higher interest rate may make sense. 

Final thoughts

Your car loan can be a major drain on your finances, so it’s only natural to want to reduce the burden. However, your options may be limited if you have bad credit. Make sure you thoroughly research each lender you’re considering to ensure they’re legitimate and don’t engage in predatory lending practices. You should also do the math to make sure applying for a new auto loan makes good financial sense.

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