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Refinancing your car loan can be a smart financial move, but it’s important to know when it’s advantageous and when it might not be the best choice.

Refinancing can lower your monthly payments, reduce your interest rate, or shorten the loan term, potentially saving you money. However, it’s not always beneficial — fees, extended loan terms, or worsening financial conditions can offset the advantages.

Keep reading to learn more about when you should refinance your car, when you shouldn’t, pros and cons of auto loan refinancing, and more.

7 Times When You Should Refinance Your Car

Here are seven situations in which you might want to consider a car loan refinance.

1. When You Can Get a Lower Interest Rate

Interest rates change all the time, especially as the economy rises and falls. Monetary policy from the Federal Reserve may influence consumer loan rates. Refinancing may be right for you if you can lock in a lower interest rate.

Among the pros and cons of refinancing a car is that it may provide you with a lower interest rate (pro), while temporarily causing your credit score to drop due to a hard pull inquiry (con).

Refinancing for a lower monthly payment in some cases may extend your term, and extending your term can saddle you with more interest charges over the life of your loan. An auto loan refinancing calculator can help you see whether a refinanced loan offer may increase or decrease your total interest costs.

2. When You’ve Built Your Credit

Another factor that may change over time is your credit. Credit-building activities (including paying your auto loan on time each month) may help your credit score. This may qualify you for lower interest rates on a refinanced auto loan.

Lenders look at several factors when determining your annual percentage rate of interest and the terms they will offer you. If your credit wasn’t excellent when you got your loan, you might not have gotten the best APR possible. But if you’ve built your credit since then, refinancing could open up better offers.

3. When Your Car Is Worth More Than You Owe

If you’ve kept your vehicle in top-notch shape and perhaps have been aggressive about paying more than you owed each month on the loan, your car could be worth more than the balance remaining on your loan.

If you’d like to take your time paying off the remainder, you might consider refinancing. There are several tips for how to refinance auto loans, such as comparing your options and paying attention to the details.

4. When You Can Pay Your Car Off Faster

Some borrowers may prefer the longest repayment period possible for their auto loans because it means the lowest monthly payment. But those longer-term loans usually have higher interest rates than loans with shorter repayment periods.

If you can afford to make larger monthly payments, you’ll probably pay less in interest and get your car paid in full faster if you can refinance.

5. When You’re Struggling with High Payments

While you may not benefit from lower interest if you refinance over a longer period, it could help if you’re stressing to pay that higher amount each month.

Let’s say you currently have a loan with a term of four years and are paying $500 a month, which is really eating into your budget. Refinancing for a six-year term could drop your monthly payment to, let’s say, $375, so you might gain a little financial breathing room. Just be aware that you might have to pay more in interest over the life of the loan.

6. When You’re Unhappy with Your Lender

If you feel stuck with a lender who isn’t offering great customer service or is otherwise making your business relationship stressful, realize that you may hold the power to walk away by refinancing with another lender.

Before deciding to refinance your auto loan, get familiar with auto loan terminology so you understand things like prepayment penalties, APR, and other terms that you’ll find in the fine print of your current loan agreement.

7. When Your Original Loan Was Through the Dealer

Refinancing may be ideal if you have car loan debt through the dealer. If you signed a retail installment sale contract when buying a vehicle off the lot of a dealership, the dealer may have sold the retail installment contract to a third-party lender, such as a bank or finance company.

This is called indirect financing because it leaves you indebted to a third-party financial institution that didn’t provide you with the auto loan financing directly. Dealerships that arrange indirect financing don’t necessarily arrange the best terms and conditions for you, so exploring your refinancing options may be right for you.

Recommended: Can You Register a Car Without a License?

When Shouldn’t I Refinance My Car Loan?

Just as important as knowing when to refinance a car is knowing when not to do it. It can be tempting when you get those offers in the mail to refinance, but there are a few situations where you shouldn’t. Here are five things to be aware of:

1. When You’re Upside Down on Your Loan

If you owe more on your car loan than the car is worth, refinancing likely won’t help the situation. In fact, many lenders won’t even approve a loan if this is your situation. Your best bet might be to keep chipping away at what you owe.

One way consumers may avoid upside down auto loans is by making a sizable down payment when buying new or used vehicles.

2. When Your Car Is Older

The older your vehicle, the less likely a lender is to approve a refinance. Bank of America, for example, won’t fund loans for cars that are more than 10 years old or have more than 125,000 miles on them.

Why? Cars lose their value so rapidly that an older model may not be worth much by the time you seek financing for it. If you aren’t able to pay your loan, the lender has the right to seize the vehicle, but if it’s not worth much, that right doesn’t do the lender much good.

3. When You Don’t Have Much to Refinance

If you owe less than $7,500, you may have trouble finding a lender who wants to refinance such a small amount. That’s the threshold Capital One, for example, requires for auto refi loans, and other lenders may have similar requirements.

4. When You Bought the Car Recently

Refinancing might not be right for you if you bought your car recently. The value of a new car can plummet immediately once you drive it off of the lot. Unless you’ve made a sizable down payment on the car, your auto loan financing may be underwater when your repayment term begins. As mentioned earlier, refinancing might not be advisable if you’re upside down on your loan.

5. When Your Loan Has Prepayment Penalties

Another time when refinancing might not be right for you is if your existing car loan includes a prepayment penalty clause. A prepayment penalty is a fee that lenders may charge if you pay your loan off early.

Getting a refi loan in some cases may trigger a prepayment penalty. That’s because refinancing pays off your existing loan and replaces it with the terms and conditions of a new financing agreement. You can check your original loan agreement to see whether it includes a prepayment penalty disclosure.

Recommended: Refinance After Repossession

Pros and Cons of Refinancing an Auto Loan

As a consumer, you may ask, “Should I refinance my car?” There’s no easy answer to this question. Your specific situation may determine whether and when to refinance a car loan. Below, we highlight some of the pros and cons of refinancing an auto loan:

Pros of Auto Loan Refinancing

•   May give you a lower interest rate

•   May give you a lower monthly payment

•   May give you a longer repayment term

Cons of Auto Loan Refinancing

•   You may need good credit to qualify

•   It may require a hard inquiry that can hurt your credit score

•   You may pay more interest over the life of your auto refi loan

Does Applying for an Auto Loan Affect Your Credit Score?

Applying for an auto loan can hurt your credit score initially, but it may also benefit your credit score if you make the required car payments on time.

Getting your auto refi loan application approved means a lender will pay off your original loan agreement and replace it with new loan terms. The refinanced loan may feature a lower monthly payment than your original loan.

Applying for auto loans and auto loan refinancing can initially impact your credit score if lenders conduct a hard pull inquiry into your credit report. But know that if you’re shopping around, getting preapproved by multiple lenders may show up on your credit report as just a single inquiry as long as they’re within the same two-week period.

Refinancing a car loan with bad credit is possible, but you probably won’t get a great interest rate. If it’s possible, it might be worthwhile to spend time building your credit so you may qualify for a better rate down the road.

The Takeaway

Refinancing your auto loan could get you a better interest rate, shorten your loan term, or lower your monthly payment, if that’s your goal. However, there are cons of refinancing to consider, too. These include lender fees and possibly paying more in interest over the life of the loan.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

When is refinancing an auto loan worth it?

Refinancing an auto loan may be worth it when you’re able to secure a lower interest rate or shorten your loan term. Depending on your circumstances, you may also find it worthwhile to refinance for a longer term and lower monthly payment, even if that exposes you to more interest charges over the life of the auto refi loan.

Can refinancing a car hurt your credit score?

Refinancing can initially hurt your credit score if lenders conduct a hard pull inquiry into your credit report. Hard inquiries may cause your credit score to drop by several points. But refinancing a car may also help your credit score in the long haul if you make required payments on time over the life of your auto refi loan.

When should you not refinance?

It’s best not to refinance a car if you owe more than the car is worth or if the car is more than 10 years old. The auto loan refinancing cost may include a number of fees, such as early termination fees, transaction fees, and title transfer fees.

Should I refinance now or wait?

The urge to refinance now may be strong, but waiting could potentially be a better option for you. Before refinancing your car, look at your credit, then check with lenders to see if you prequalify. If you aren’t able to get a lower interest rate than what you’re already paying, it might be better for you to wait.

Photo credit: iStock/miniseries

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOALR-Q225-037

You might think of a car loan as one that uses the vehicle as collateral — in other words, a secured loan. Another option exists: an unsecured loan when the vehicle isn’t put up as collateral. This is a significantly different type of loan structure.

A car loan can either be secured with collateral or unsecured without collateral, and both options can provide you with financing to buy a car. So, what exactly are the differences between an auto loan that’s secured or unsecured, and which is better? Below, we highlight the pros and cons of a secured vs. unsecured auto loan to help you determine which one is right for you.

What Is a Secured Auto Loan?

When wondering is auto loan secured or unsecured, there are basic differences to know. First, a secured auto loan is financing that helps a borrower buy a new or used car while giving the lender a security interest in the financed vehicle. Lenders may repossess the vehicle as collateral if the borrower fails to make required payments on the secured car loan.

The security interest is a lien that holds the vehicle as collateral until the car loan is paid off in full. Lenders — or the lienholder of your secured auto loan — may hold the car title until you pay off the debt.

What Is an Unsecured Auto Loan?

An unsecured auto loan is financing that helps you buy a car without giving the lender a security interest in the vehicle. Borrowers can use this type of loan — usually a personal loan — to buy a new or used car without pledging any assets as collateral.

Lenders may offer a higher annual percentage rate (APR) for unsecured car loans because the loan is not secured with collateral, which means the lender may not seize your car in the event of default.

Are Auto Loans Secured or Unsecured?

Most auto loans are secured by the financed vehicle, but lenders may also offer unsecured auto loans, though they are much less common.

As mentioned, with a secured auto loan, if you fail to make your payments, the lender has the right to repossess the car to recover their losses. This setup reduces the lender’s risk, which often results in lower interest rates compared to unsecured loans. Because the vehicle backs the loan, lenders are generally more willing to approve financing, even for borrowers with less-than-perfect credit.

Secured vs Unsecured Car Loans

When deciding between secured vs. unsecured loans, it’s important to consider the pros and cons of each:

When deciding between secured vs. unsecured loans, it’s important to consider the pros and cons of each:Here are some of the factors that a lender may consider when deciding whether to approve or deny your secured or unsecured car loan application:

•   Proof of identity

•   Annual income

•   Credit history

•   Credit check results

•   Debt-to-income ratio

Here’s a rundown on some of the car loan requirements:

Income

Lenders may check to make sure you have enough income to afford a car loan, and what “enough” means can vary by financial institution. Ways that lenders may verify your annual income include asking for pay stubs, bank statements, or tax returns.

Recommended: No Income Verification Loans

Credit History

Because past payment history can predict a person’s future actions, lenders may want to see that borrowers have a pattern of meeting their financial obligations. As such, a review of your credit history is typically part of the loan approval process for a vehicle.

Credit Check Results

Results of your credit check can play a key role in determining what interest rate you’re offered. Borrowers with excellent credit may qualify for a 0% APR car loan secured by the financed vehicle.

Debt-to-Income Ratio

Your debt-to-income ratio (DTI) calculates the percentage of your pretax income that goes toward your monthly debt payments. Lenders like to see low DTIs — generally below 36% — because a low DTI reduces their levels of risk, while a higher one can indicate that a borrower is carrying too much debt for their gross income.

How Can I Get an Unsecured Auto Loan?

Here are the steps you may take to get an unsecured car loan:

1. Shop Around for Unsecured Car Loans

With an unsecured loan, seek out lenders that will loan on a car without requiring collateral. Lenders may offer this type of financing as a signature loan or unsecured personal loan.

2. Fill Out and Submit Your Loan Application

You can fill out and submit your unsecured loan application with the lender of your choice. Good credit scores are especially important for unsecured loans because the lender generally makes approval decisions based on the applicant’s financial record and situation. The interest rate may also depend on the individual’s credit score.

3. Receive Your Loan

Loan approval is never guaranteed, but lenders may approve your unsecured car loan if you meet the lender’s underwriting standards. Just like with secured loans, a lender may want to assess whether you have enough income to make the payments. You may get approved for tens of thousands of dollars in financing if you have excellent credit and a DTI below 36%.

4. Find and Buy a Car

You can find and buy a car using an unsecured loan. The loan can help you buy a new or used car from a dealership or private seller.

Recommended: What Happens to a Car Loan When Someone Dies?

Car Financing Options

When shopping for an auto loan, it’s important to assess your options. You’ll want to set your budget before you head out shopping, and it’s also a good idea to check your credit in advance so you have a good sense of where you stand and what your odds of qualification are. This could give you a sense of whether you may need a cosigner.

You may shop for car loans from multiple sources. Getting prequalified or preapproved can help you compare rates. Once you have an auto loan offer in hand, it is critical to read the fine print before you commit. Specifically, keep an eye out for your interest rate, the length of a car loan, any fees and penalties, and other key aspects of the agreement before moving forward.

If you already have a car loan and are looking to reduce your monthly payments, consider auto refinancing. If you’ve got a more challenging situation, such as an upside-down auto loan where the loan amount is higher than the value of the car, it can take more research to find the right lender.

Recommended: Can Car Loan Companies Garnish Your Wages?

The Takeaway

Auto loans can be divided into two broad types: secured, where the vehicle is put up as collateral, and unsecured, where a borrower’s credit history and financial situation are primarily considered when a lender makes an approval decision. Although the borrowing processes are similar in many ways, there are key differences between secured vs. unsecured auto loans.

If you want to change your current loan, an auto loan refinance may allow you to lower your interest rate, shorten or lengthen your term, or switch from an unsecured loan to a secured loan.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

What is a secured car loan?

A secured car loan is a type of financing that helps a borrower buy a new or used car while giving the lender a security interest in the financed vehicle. The security interest is a lien that holds the vehicle as collateral until the car loan is paid off in full. Lenders or the lienholder of your secured auto loan may hold the car title until you pay off the debt. Lenders may seize the vehicle as collateral if the borrower defaults on the secured car loan.

What is an unsecured car loan?

An unsecured car loan is financing that helps you buy a car without giving the lender a security interest in the vehicle. Borrowers can use this type of loan to buy a new or used car without pledging any assets as collateral. Lenders may not seize your vehicle if you default on an unsecured car loan.

Are secured car loans better than unsecured car loans?

Your personal preferences may dictate whether a secured car loan or unsecured car loan is right for you. You may qualify for a lower interest rate on a secured car loan, but the lender may repossess your vehicle if you default. An unsecured car loan gives the lender no right to repossess the vehicle if the borrower defaults on the loan.

Photo credit: iStock/Halfpoint

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOALR-Q225-036

Your car loan’s interest rate might be higher than you’d like, particularly at a time when inflation eats away at your paycheck.

But if you had a “bad” credit rating when you got the car loan, that interest rate might have seemed like the best option you could get. If that’s the case, you might now be wondering whether refinancing your car with bad credit could be a more cost-effective move than keeping your current car loan.

The answer is that sometimes, auto refinancing with bad credit may be a sound idea. But you should proceed with caution. Here, you’ll find out if and how to do it.

Introduction to Refinancing with Bad Credit

It’s possible to refinance a car with bad credit, but you might face some challenges along the way. Some refinance lenders, for example, may be unwilling to extend credit to borrowers with FICO® Scores below 580.

To put it in a larger context, the average new-car-loan interest rate for a buyer with an excellent credit score was 5.08% in late 2024, according to Experian. But the average rises to 15.43% for borrowers with poor credit

Some lenders may offer subprime auto refinancing, but you might have difficulty refinancing a car if you’re currently in delinquency on your existing auto loan. Borrowers who fail to make required payments on their existing car loans may fall short of a lender’s minimum requirements for refinancing.

Lenders generally offer their best terms and lowest annual percentage rates (APRs) to borrowers with excellent credit. You may secure better terms when auto refinancing with a cosigner, particularly if the cosigner has prime credit.

Refinancing may be right for you if it lowers your car loan interest rate, but you may pay more interest over the life of the loan if you refinance with an extended term. Another potential drawback of refinancing is it typically involves a hard inquiry, which can remain on your credit report for two years and cause your credit score to drop several points.

Recommended: Is an Auto Loan Secured or Unsecured?

Can You Refinance Your Car Loan Even If You Have Bad Credit?

When you think about how to refinance a car loan with bad credit, you probably wonder first of all if it’s possible. You may even have been thinking, Will refinancing my car hurt my credit score even more?

The good news is that, yes, you can refinance your car loan with bad credit. Doing so can be a good idea, especially if you can get a cosigner whose credit is in good standing, if your credit has improved lately, or if car loan interest rates have dropped.

There are also potential downsides to consider, of course. You’ll want to be aware of the cost of financing a car, taking into account any fees or prepayment penalties charged by your current lender. And refinancing your loan may temporarily lower your credit score — usually for no longer than about one year.

But overall, refinancing may be a way to lower your monthly auto loan payments, which could help you save money. Just remember, it’s important to weigh the pros and cons of refinancing your car before you make the leap and sign up for a specific loan.

What Is a “Bad” Credit Score?

You’ve probably researched what is a good credit score and not been thrilled with the answer. No one enjoys having the word “bad” attached to a record of their finances. What must first be understood is that credit agencies bestow the definitions.

Three credit agencies — Equifax®, Experian®, and TransUnion® — collect and store the information that helps potential lenders or employers rate your reliability. When you request an increase on your credit limit, apply for a loan, or apply for a new rental home or a new job, your credit report will likely come into play.

There’s no getting around the importance of credit. In the world of credit reports, “bad” is anything less than “good,” and it encompasses both “fair” and “poor.” And those two definitions cover a wide range. Trying to find an auto loan refinance for fair credit is different from searching for one when your credit is poor.

There are variations among the credit agencies, but here are the most common numbers for the credit scores:

Is It Smart to Get an Auto Loan Refinanced With Bad Credit?

Financial advisors caution that someone with poor credit is unlikely to get an auto refinancing deal that will really help their situation. However, it might be possible to refinance auto loan debt with fair credit, which falls between 580 and 669.

About 17% of Americans have fair credit with FICO Scores in this range, according to Experian. Applicants with this score are still considered to be subprime borrowers, meaning their credit standing is less than what is normally desired. So, an auto loan for fair credit is by no means a sure thing, though they do happen. A cosigner with good credit can help.

Apart from the score itself, other conditions can play a role in the decision.

Factors to Consider Before Refinancing with Bad Credit

Here are some important factors to consider before refinancing with bad credit:

•   There’s no guarantee you’ll be approved for auto refinancing

•   Refinancing can hurt your credit score if the lender does a hard inquiry

•   An auto loan refinance calculator can help you determine whether refinancing is right for you

•   Refinancing may be right for you if you can secure a lower interest rate

•   Extending your loan term may reduce your monthly payment, but your interest costs may increase

•   Refinancing for a shorter term may reduce your total interest costs, but your monthly payment may increase

•   You could borrow extra funds with cash out auto refinancing, depending on your equity in the car

•   It can be difficult to refinance an upside down car loan, which is when your outstanding loan balance is greater than the appraised value of your car

•   You may not be eligible for refinancing if you owe less than $3,000 on a car loan

Recommended: Financing a 10-Year-old Car

When Should You Refinance Your Car?

How soon can you refinance an auto loan? The best time to refinance your car, even with bad credit, is typically when one of the following situations applies:

•   If your credit score has improved. It’s helpful to check your credit score periodically, which you can do through many credit card and financial institutions, to see where you are. Refinancing a car when your credit score is trending up may help you refinance for a lower interest rate and better terms.

•   When interest rates are dropping. Whenever car loan interest rates are down could be a good time to refinance your car. This is especially true if you have a few years left on your car loan and you can lower the interest by a few points. Refinancing to a rate that’s lower by 2 or 3 percentage points could result in savings that will really add up over the length of your loan.

•   When your car’s value is still high. Check out sites like Kelley Blue Book or Edmunds.com to see what your car’s current value is. If the car’s value has dropped significantly and you owe more than the car is worth, it’s usually not a good idea to refinance. If the car is holding its value, this may be a good time to refinance it, assuming that interest rates are lower than they were when you bought the car.

•   If you’re struggling to make your car payments. When your auto loan interest rate is very high and you still have a few more years left on the loan, refinancing could be an option to reduce your monthly payments and help free up some cash in your budget. You may want to seek out a service that will compare auto loan refinancing options for you.

Comparing Auto Loan Refinance Lenders

When you’re considering whether to refinance auto loan debt with fair credit or even poor credit, here are some tips to keep in mind:

Compare Multiple Loans

Don’t automatically settle for the first loan. Research to find the ones to help you lower your car loan payments.

Examine the Interest Rates

This is a key point when comparing loans, especially when looking for an auto loan refinance for fair credit. But remember, you need to allow for your bad credit as well as factors like whether it’s for a new car loan, a used car loan, or a refinanced car loan.

Look at the APR

The lender should provide you not only with what your monthly payment would be, but also the APR. This figure explains what you will be paying above principal every year and includes not only interest but also any fees.

Consider the Length of the Loan

Your monthly payments and even your interest rate might seem a lot lower, but you’ll also need to look at the length of your refinanced car loan. You don’t want to find yourself with extended car payments that go beyond your initial loan and don’t ultimately save you money.

Make Sure You Can Afford It

A great interest rate won’t help you if you still can’t pay the monthly payments on the loan, so be sure you understand what the bill will be every month.

Ask About Promotions

First, you might want to ask your current lender about refinancing and inquire about any promotions running. Take those numbers when you shop around with other lenders to see what they can offer you.

Be Careful with Subprime Lenders

Lenders that specialize in refinancing for people with bad credit — particularly poor credit — may seem helpful, but watch out. Some may be predatory and charge exorbitant interest rates. That’s another reason to be sure to do your research and compare options!

Avoiding Predatory Lending Practices

As mentioned above, you’ll want to watch out for predatory lending, including lenders that charge excessive rates and fees.

Borrowers with credit of 455 to 599 have an average interest rate of 14% for a refinanced car loan in May 2025, according to US News and World Report.

You may be able to refinance for a lower monthly payment, but be cautious of lenders that steer you toward long-term refinancing. Your total interest costs may increase if you refinance for a longer term.

In general, paying off a car loan early will minimize your interest costs. But some lenders may charge prepayment penalties to discourage you from paying off debt ahead of schedule. Beware of lenders that charge prepayment penalties.

How to Improve Your Chances of Refinancing with Bad Credit

As mentioned earlier, there’s no guarantee you’ll be approved for auto refinancing. Applying with a creditworthy cosigner, however, may improve your chances of approval.

Having bad credit doesn’t necessarily disqualify you from refinancing a car. Lenders may consider you for auto refinancing if you have steady income and a current car loan that’s not in delinquency or default.

Making required payments on your existing car loan may improve your chances of getting approved for a refinance car loan, even if you have bad credit.

How to Refinance a Car Loan with Bad Credit

Here’s a step-by-step guide on how you can refinance a car loan with bad credit:

•   Avoid delinquency. Continue to make required payments on your existing car loan as you explore potential auto loan refinance options.

•   Seek cosigner. Consider applying with a creditworthy cosigner to help you refinance a car.

•   Shop around. Search online and see whether you prequalify for refinancing.

•   Compare rates. Find and compare prequalified rate offers from different lenders, including credit unions and private lenders.

•   Gather documents. Have any necessary documents in hand, including your driver’s license and proof of car registration in your name.

•   Submit application. Apply for the refinancing that’s right for you.

•   Make payments. Pay any required fees and payments on your new auto loan refinance.

The Takeaway

It may be possible to refinance auto loan debt with fair credit if you research your options and find a reputable lender that will work with you. Refinancing to a better rate after your credit score has improved and the interest rates have decreased can save you money in the long run. Using a cosigner who is in good credit standing might help you get a better rate and lower your monthly car payment.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

Can you refinance an auto loan with bad credit?

Yes, you can usually get a refinance offer, especially if your credit rating is “fair,” but you will get the most advantageous deal if your credit rating has improved since your original loan and other conditions are right.

Where is the best place to refinance an auto loan with bad credit?

There are lenders who specialize in people with subprime credit. Be careful that they are not using predatory practices, with high interest and hidden fees.

Is it smart to refinance an auto loan with bad credit?

It makes the most sense to refinance if you can get a lower interest rate so you can put more money in your budget. Just keep in mind that refinancing typically involves a hard inquiry, which can have a negative impact on your credit score.

Photo credit: iStock/Pofuduk Images

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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While you can refinance your car with the same lender, there’s more to the decision-making process than just picking the lender that currently has all of your account information.

If your lender does offer auto refinance loans, you shouldn’t just assume they are necessarily the best option out there. Different lenders offer different rates, loan terms, and fees, so it’s important to shop around. Below, learn more about how refinancing works with the same lender and when it makes sense to explore elsewhere.

What Does It Mean to Refinance a Car?

Refinancing a car means replacing your current auto loan with a new one, ideally with a more favorable interest rate or better terms. Rather than making payments on your old loan, you’ll pay it off with the new loan and start making payments on that.

Why Would You Want to Refinance?

There are many reasons to refinance your car, including:

•   Lowering your interest rate. This is one of the best reasons to refinance. A lower interest rate can both lower your monthly payments and reduce the amount you pay in interest overall, assuming you keep your loan term the same or shorter.

•   Paying off your loan faster. This involves shortening your loan term. If you secure a lower interest rate and shorten your loan term, you’ll not only pay off your loan faster, but you’ll also save money in interest in the long run. However, your monthly payment might go up.

•   Reducing your monthly payments. If you refinance your car and choose a longer loan term, your monthly payments most likely will decrease. While this typically means you’ll pay more in interest over the life of the loan, sometimes reducing payments is necessary to keep you afloat during hard financial times.

•   Removing a cosigner. If you took out your original auto loan with a cosigner, you can choose to remove them by refinancing, assuming you can qualify for the new loan on your own.

Is It Possible to Refinance With the Same Lender?

If you’re thinking of refinancing, you may be wondering if you can do so with the same lender. In most cases, the answer is yes — but that doesn’t mean it’s automatically the right decision for you.

When you first start thinking about refinancing your auto loan, it’s natural to consider your current lender, especially if you’ve had a positive experience. Not all auto lenders offer refinancing, though. Most do, but it’s a good idea to double-check that this option is available before you do more digging.

Can you refinance your auto loan with the same bank? Absolutely. Is it always the best loan offer available? Not necessarily. And you won’t know for sure unless you shop around.

Recommended: Business Auto Loans: How to Get Financing

When Does It Make Sense to Refinance?

There are many pros and cons to auto refinancing. Here are some of the most common situations in which it makes sense to refinance:

You Now Qualify for a Lower Interest Rate

If interest rates go down or you have built your credit score, you could save money with a lower rate. Refinancing may be right for you if you qualify for an interest rate that’s lower than your current auto loan rate.

You Have a Helpful Cosigner

If your credit score isn’t very high, refinancing with a cosigner could also help you pay less in interest. Refinancing may be right for you if you have a creditworthy cosigner who can help you qualify for an auto refi loan that’s more favorable than what you currently have.

Likewise, you may have signed your original auto loan with a cosigner and now you want to remove them from the loan. If you can qualify on your own, refinancing your car will allow you to do so.

You Want to Lower Your Monthly Payment

You might be able to get a longer loan term by refinancing. This means you’ll be making payments longer, but your monthly payment will be less. Keep in mind that by extending your term, you may end up paying more in interest over the life of the loan. However, if you need a lower payment, refinancing may be right for you in order to make ends meet.

Your Car Is Aging or Has High Mileage

Many lenders restrict your ability to refinance a car loan once the vehicle reaches a certain age or mileage mark. If your car is close to 10 years old or is approaching 100,000 miles, then it might be time to crunch the numbers to see if one last refinance makes sense. Refinancing a car with high mileage is possible and may be right for you depending on your personal circumstances.

Recommended: Tips for Buying a High Mileage Car

Is It Easier To Refinance With Your Current Lender?

When you apply to refinance your auto loan, you’ll need to submit documents related to your current loan, including the loan agreement.

If you’re applying to refinance through your current lender, it will probably already have that paperwork on hand. But while it may seem easier to let your current lender handle this step on its own, you should still find and review that information yourself before you apply to refinance. That way you can check the contract for prepayment penalties and your exact payoff amount.

It’s also important to check your current interest rate to figure out whether or not you’re getting a better offer with a refinance.

Even if it does seem easier to refinance with a lender you’re already working with, it’s crucial to rate-shop and make sure you’re meeting your financial goals. If you find a better deal elsewhere, it may not be that much harder to switch. Most lenders create an easy, streamlined application process.

In summary, it can be easier to get a refinancing loan from the lender you already know. But “easier” doesn’t automatically mean it’s better.

How to Refinance With the Same Lender

How exactly to refinance an auto loan may differ slightly when you’re applying with the same lender. Here are the steps for how you may refinance with the same lender:

•   Gather the required documentation. Even if you have a history of making your car payments on time, you’ll still probably need to provide proof of income. This could be recent paystubs or a tax return.

•   Confirm and update your personal information, including your address and how much you spend on housing each month. The lender likely has other details about your current loan and vehicle. Nonetheless, it will probably pull a credit report to see where you stand today. Your credit score may drop by a few points temporarily if the lender conducts a hard pull inquiry into your credit report.

•   Receive a loan offer based on your personal information and your vehicle information. The offer may include an interest rate, any fees, and the length of the loan term. Review all of these details and compare this offer to offers from other lenders to see which is the best option for you.

Why You May Want To Refinance With a Different Lender

Lenders all vary when it comes to rates, loan terms, and fees, so it’s always best to shop around in order to find the best auto refinance deal for your situation. While refinancing with the same lender may be easier, if you can save hundreds or thousands by going elsewhere, that may be worth your time and effort in the short term.

How To Refinance With a Different Lender

Even if you were interested in refinancing with your current car loan provider, you might find a better deal elsewhere and decide to change lenders. Here are the steps on how you may refinance with a different lender:

•   Submit the required documentation. In addition to the financial and income verification you need to apply with your existing lender, a new lender will likely need information about your vehicle and current loan.

•   Submit details about your vehicle. This includes the make, model, and year. You must also disclose the vehicle’s mileage and supply the lender with the vehicle identification number (VIN).

•   Provide the current loan balance and lender’s contact information. The application may also require you to submit proof of auto insurance.

•   Check your credit. The lender may check your credit report. This can result in a small, temporary drop in your credit score. But if there are multiple credit inquiries for the same kind of loan within a short period of time on your record, they’ll typically be counted as just one, since the credit score agencies understand that you’ve been shopping to find the best rates.

•   Get prequalified, if possible. Some lenders may allow you to prequalify for a loan, which won’t typically result in a credit drop. But note that the offers you see that way aren’t guaranteed, especially if your financial situation changes before you actually apply for the loan.

•   Apply for and accept the loan. Once you’ve selected the loan you want to apply for, the process will be similar to that when you apply with the same lender, except that when you’ve received and accepted the loan terms, your new lender will transfer the funds to pay off your old loan and your new payments will begin.

The Takeaway

It is generally possible to refinance your auto loan with your current lender. It may even be a bit easier than filling out an application with a new lender. However, it doesn’t mean that it’s financially the best option for you. In order to find the best auto refinance loan, it’s best to shop around to find the best rates and terms for your particular situation.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

Is it better to refinance with the current lender?

No, it’s not necessarily better to refinance with your current lender, even if the process is easier. In addition to considering refinancing with your current lender, compare online auto loan refinancing rates with multiple lenders. Once you look at a few different offers side by side, you can likely see which one best helps you meet your goals, whether it’s saving on your interest rate or lowering your monthly payments.

When does it make sense to refinance with the same lender?

It makes sense to refinance with the same lender when that lender extends the best offer among multiple lenders. That may be the case — and maybe your current lender can even offer you a loyalty rate discount on top of expediting the application process. But if you get a better offer from another lender, you may be better off switching.

When does it make sense to refinance with a different lender?

Depending on your financial situation and goals, if another lender offers you a lower interest rate or lower monthly payments, then it may make sense to accept that refinance offer. There are some pitfalls to watch out for, however. Make sure there are no hefty upfront fees that could reduce your potential savings. Also confirm that there’s no prepayment penalty in case you want to pay off your loan early.

Photo credit: iStock/Altayb

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOALR-Q225-034

When you’re buying a new or used vehicle, you might prefer to finance your purchase with an auto loan rather than pay cash up front. Auto loans may offer favorable interest rates for buyers with good credit history and stable income. Before signing off on any vehicle financing, however, it’s important to be sure you understand some basic auto loan terminology.

Here’s a brief glossary of basic car loan definitions that can help you select the right borrowing option.

Auto Loan

A vehicle loan is essentially a contract between the car buyer and the financing company or lender. This contract spells out the conditions for completing the purchase of the vehicle and lays out exactly how the loan will be repaid over time.

Banks, credit unions, online lenders, and financing companies are all places you can get an auto loan. Dealerships may also offer in-house financing, in which you repay an auto loan directly to the dealer.

Recommended: What Is a Buyer’s Order for a Car?

Annual Percentage Rate

Annual percentage rate (APR) is one of the most important car finance terms to know because it relates to how much you’ll pay for a vehicle loan. APR is a reflection of the annualized cost of borrowing money, based on the interest rate and fees charged by the lender.

In auto loan terminology, APR gives you a simple way to compare the cost of different vehicle loans. Say you have two lenders you’re considering for vehicle financing. One offers a loan with a 3.99% APR, while the other is advertising a 2.99% APR. Of the two, the second loan will cost you less money in interest over time.

When you’re comparing APRs for vehicle loans, pay attention to whether interest rates are fixed or variable. A fixed APR stays the same for the life of the loan, which means you can easily calculate the total amount of interest you’ll pay. Your monthly payments will also stay the same for the life of the loan. This tends to be the most common type of car loan.

With variable-rate auto loan financing, the APR is tied to a benchmark rate, such as the prime rate. If the benchmark rate increases or decreases, the loan’s APR can also change. This makes it more difficult to predict total interest costs, and monthly payments may not stay the same throughout the life of the loan.

Base Price

When you’re applying for auto loan financing, you may see the term “base price” mentioned. Base price reflects the purchase price of the vehicle as is, without add-ons. The actual purchase price may be higher if you add on optional equipment, upgrades (like that premium sound system you’ve had your eye on), or purchase extended warranties or maintenance contracts.

Cosigner

Lenders typically use credit scores to determine whether you’re eligible for an auto loan or an auto loan refinance and what interest rate they’ll charge you. (The higher your score, the more likely you are to get the best, or lowest, interest rates.) If you don’t meet a lender’s minimum credit score and income requirements, you may need a cosigner if you want to finalize the loan.

An auto loan cosigner is someone who agrees to assume equal responsibility with you for an auto loan. If you default on the loan and fail to pay it back, the cosigner is liable for repaying what’s owed. A cosigner is usually a relative or significant other with a solid credit history. Keep in mind, though, that only the person whose name is on the title has legal rights to the vehicle itself.

Deficiency Balance

If you fail to repay your loan and your vehicle gets repossessed and sold by your financing company to recoup its losses, and you owe more on the car than the company is able to sell it for, the financing company can still hold you responsible for paying the difference. That gap is called the deficiency balance. You may also be responsible for paying any repossession fees.

Down Payment

A down payment is a payment you make upfront against the purchase price of a vehicle you’re buying. This is similar to a down payment you might make on a home — the goal in both cases is to reduce the amount you need to finance.

Depending on your credit and where you’re buying your vehicle, you may be able to get auto loan financing with no money down. But there are some advantages to making a larger down payment. For one thing, you’ll have a smaller loan, which means less money you’ll pay in interest over the life of the loan. A smaller loan can also lower your monthly payments, which can make financing a vehicle more affordable for your budget.

Recommended: Does Financing a Car Build Credit?

Extended Warranty

If you’re buying a new or used vehicle from a dealer, you might be asked if you want to purchase extended warranty coverage. Extended warranties may cover basic maintenance or repairs to the vehicle for some time beyond the original manufacturer’s warranty.

Whether it makes sense to pay extra for an extended warranty can depend on the age of the vehicle, how long you plan to own it, and how much cash you have in reserves to cover repairs and maintenance. The cost of an extended warranty can be added to your auto loan’s terms, meaning it would affect your monthly payment.

Interest Rate

The interest rate on a vehicle loan is simply the rate that’s charged annually, without factoring in any fees. Interest rate was already mentioned as a part of your APR, but it’s helpful to know what it means by itself, too.

A lower interest rate can translate to a lower APR, but when you’re comparing car finance terms, you mustn’t get the two of them confused. If you have two loans you’re considering, you may want to look at each of their interest rates side by side as well as their APRs to get a sense of the costs. That way, you’re comparing apples to apples vs. apples to oranges, as the saying goes.

Recommended: 144 Month Auto Loans

Loan Term

A car loan term simply means how long you’ll make payments on the loan. Auto finance terms may largely depend on how much you’re borrowing. A larger loan amount might require a longer loan term so that your monthly payments are affordable for your budget. A smaller loan may require less time to pay off.

Usually, car loans range from two years to eight years, though you may find exceptions. A loan term of five or six years is common.

Monthly cost is important to consider when choosing a car loan term, but also think about what the timeframe means in terms of how much interest you’ll pay. Generally, the longer the loan term, the more the interest charges will add up over time. Paying off a shorter loan term could make the payments higher, but it can reduce the amount of interest you’ll pay altogether.

Loan to Value Ratio

Loan to value ratio (LTV) represents the total dollar value of your vehicle loan divided by the car’s actual cash value. Actual cash value is what the car is worth according to independent valuation providers, such as Kelley Blue Book. Making a larger down payment can reduce your LTV ratio.

Recommended: How to Sell a Car You Still Have a Loan On

Principal

When it comes to car loan definitions, it’s important to understand that auto loan principal is terminology for the amount you owe minus any interest, fees, or finance charges. When you make payments on a vehicle loan, part of what you pay is applied to the fees and interest, while the rest is applied to the loan’s principal.

Your lender or financing company should provide you with an amortization schedule that breaks down how your payments are applied. Typically, a higher percentage of your payments will go toward interest and fees during the early part of your loan term. Once most of the interest is repaid, more of your payments will go toward the principal.

Total Cost

Total cost is a simple car loan term that means the total amount you’ll pay for financing. This amount includes the principal, interest, fees, and any money you apply toward a down payment.

Recommended: Smarter Ways to Get a Car Loan

The Takeaway

Auto loans can vary, so it’s important to understand the terminology and to do your research before selecting one. When you’re comparing vehicle financing options, it’s a good idea to consider what different lenders offer in terms of interest rates, fees, repayment terms, and loan amounts.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

What is the typical term for a car loan?

Car loan terms usually range from two to eight years, with five or six years being typical.

Are most car loans fixed-rate or variable?

Most car loans are fixed-rate, but variable-rate loans may also be available. While a fixed-rate loan could end up being more expensive if rates drop, it can be helpful to have a consistent monthly payment when budgeting.

What is a car loan’s APR?

A car loan’s APR is the annual percentage rate. This figure reflects the interest rate plus any other fees and loan costs. It more accurately reflects the cost of the loan than simply the interest rate.

Photo credit: iStock/takasuu

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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