How to Refinance a Car Loan with Bad Credit

Do you currently have a vehicle that’s financed with a car loan? Are you locked into your loan for a period of 36 to 84 months with a fixed rate of interest that you don’t like? Or maybe you’re struggling to pay the bills and need more time to repay your loan. No matter your situation, refinancing a car loan can provide advantages, and the good news is that it’s even possible to refinance a car loan if you have bad credit. 

What Is Refinancing?

Refinancing occurs when you have already taken out a loan on a car, but you decide to apply for a new one. Technically, you can refinance any type of loan, including a mortgage, and it’s a great way to take advantage of lower interest rates to reduce your costs of borrowing. 

With the refinancing process, your new lender will pay out your old loan. They will provide you with a new loan repayment term, which may span 36 to 84 months; your loan will also be subject to a new interest rate based on the current prime rate and your credit standing. 

When Should You Refinance a Car Loan?

Depending on your lender, there may be rules about when you can refinance your car loan, but there may also be penalties for doing so. For this reason, it’s best to speak with a trusted advisor to find out whether the benefits of refinancing your car loan outweigh the costs. 

Refinancing With Bad Credit

If you’re dealing with a history of bad credit, the best recommendation is to wait at least a year before refinancing your car loan. This gives you enough time to build a good reputation with your lender by making your car loan payments in full and on time. A year’s worth of consistent payments on a large loan, such as a car loan, will go a long way toward increasing your credit score, making you appear more favourable in the eyes of a new lender. 

Reasons to Refinance a Loan

We face all kinds of unexpected challenges each day, and there may be many reasons you can’t make those car loan payments in time. Maybe you have been temporarily laid off or lost a job. Maybe you’re navigating a career change and are taking time off work to update your skills. Maybe you need to pay your high school graduate’s college tuition, or your roof springs a leak, and you’re stuck with expensive repairs. The point is that life happens, and the best way to navigate change is by being proactive in dealing with your loan. 

You Can’t Make the Payments Anymore

If your payments are too high and you are struggling to manage your debt, refinancing may be a perfect option for you. The trick is to refinance before you miss any payments and before your credit score decreases. 

An improved credit score increases your chances of securing a loan with a lower interest rate, which essentially means that your cost of borrowing goes down. With a new loan comes a new loan term, so if you are already three years into a seven-year term, you have the ability to negotiate new loan terms and pay the balance of your loan over a longer term. This is a great way to lower your monthly payments to better manage your monthly costs. 

Your Interest Rate Is Too High

Another reason to refinance your car loan is to take advantage of lower interest rates. Interest rates tend to change over time depending on how the economy is faring. In times when the government wants to stimulate consumer spending, the Bank of Canada lowers interest rates so people will start using credit to buy more goods; these include items such as houses, cars, sports vehicles, and giant flat-screen TVs. Then, when it’s time to reign in spending (including to cool a red-hot housing market), they’ll increase interest rates, discouraging people from buying goods using credit. If you secured your loan when the interest rates were high, you can benefit by refinancing your loan with a lower interest rate. 

You Have a Bad Credit Car Loan

If you secured your car loan when you had bad credit, it’s possible you have a bad credit car loan. Bad credit car loans are specifically designed for individuals who suffer from poor credit, including newcomers to Canada and students, as they have absolutely no credit record or very limited history of using credit in this country. 

Bad credit car loans are also a way for individuals with a consumer proposal or bankruptcy on their credit record to secure a loan they otherwise couldn't get from a traditional lender. While these loans will get you into the car you need, the main drawback is that your costs of borrowing will be high.

The good news is that once you’ve made at least a year's worth of payments and you’ve improved your credit standing, refinancing is a great way to get out of a very high-interest car loan. It’s a strategy we recommend to our clients when they buy a car and have no choice but to get a bad credit car loan to pay for it. 

Can I Refinance a Car Loan with Bad Credit? 

If you have bad credit, you can still refinance your car loan. The main thing to remember when you suffer from bad credit is that you may end up paying higher interest rates. If your credit score has dropped since you secured your current loan, your interest rates might be higher, so it’s best to speak to an advisor to assess whether an extended loan term can counter the cost of these higher rates.  

Things To Be Aware of When You Have a Bad Credit Car Loan

If the idea of paying a very high interest rate for your car loan seems less than ideal, keep these points in mind.

You Have to Start Somewhere! 

Building credit is a process that takes time to achieve. With the right strategy of building credit using credit cards, paying cell phone bills, and taking out other loans, you’ll soon notice your score increase. It’s also helpful to have the right advisor in your corner, providing guidance on achieving your goal.

Bad Credit Car Loans Help Improve Your Credit

Bad credit car loans get you into the car you need and allow you to improve your credit rating at the same time. When taking out a bad credit car loan, keep your borrowing costs down by taking out a smaller loan. Choose a lower-priced car that you can comfortably afford and delay buying the fancier car until your costs of borrowing go down. 

Make Your Loan Payments on Time

When you have a bad credit car loan, it’s crucial to make your loan repayments on time. Consistent payments reflect well on your credit report. Consistent payments show potential lenders that you have a good relationship with credit and can manage money responsibly. 

Don’t Let Your Loan Payments Drop Off

If you think you're headed into a situation where you can’t make your payments, call someone about it right away. Lenders would rather help you figure out a more manageable way to repay your loan than deal with a default on the loan.  

What Is the Refinancing Process?

To get started on the refinancing process, you can call us or come into the dealership and talk to one of our advisors. We’ll assess your situation, examine your credit profile, and advise you on a refinancing strategy. 

We work with several lenders, including banks and non-traditional lenders, and will find you the best possible interest rates and loan terms. We don’t waste time talking to multiple lenders; we have extensive experience in financing and strong relationships with our lenders, so we know which lenders are likely to refinance your loan. We’ll even take the time to discuss your credit history and suggest strategies to improve your credit score. 

Where to Refinance Your Car Loan in Alberta

Whatever your reasons for wanting to refinance your loan, we can help! Our financial advisors at Insta Auto Solutions are here to assist our existing customers in navigating their refinancing options. We also welcome new clients who purchased cars or secured their loans with an external lender. If you’d like to learn more about refinancing your car loan, reach out to our experts!