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Refinancing a Car Loan with Bad Credit

Learn about refinancing your car loan with bad credit and the pros and cons of doing so right here with Savvy today!
Published on December 15th, 2020
  Written by 
Thomas Perrotta
Thomas Perrotta is the managing editor of Savvy. Throughout his time at the company, Thomas has specialised in personal finance, namely car, personal and small loans, although he has also written on topics ranging from mortgages to business loans to banking and more. Thomas graduated from the University of Adelaide with a Bachelor of Media, majoring in journalism, and has previously had his work published in The Advertiser.
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   Reviewed by 
Bill Tsouvalas

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Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
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There are many potential benefits for refinancing a car loan, from accessing better rates to adjusting your repayment terms. However, if you have bad credit, refinancing your car loan may not be as simple. That’s why it’s important to understand how this process works and its benefits, particularly for those who’ve struggled with their credit in the past. Learn all about refinancing with bad credit right here with Savvy today!

Can you refinance a car loan with bad credit?

In some situations, you may be able to refinance your car loan deal if you have bad credit. However, whether you can do so will depend on your profile and lender.

Firstly, as a borrower, you’ll need to show potential lenders that you’re in the following situation:

  • You’ve consistently made repayments on time and in full
  • You’ve decreased or eliminated other bad debts
  • You’ve continued to have stability in your life, such as a consistent recent employment, income and residential history

If you had bad credit when you took out your car loan but have made strides to improve it with the points above are considered by financiers to have “correctable credit”.

This means that you’re capable of taking positive steps towards a better financial situation and are considered a lower risk than you were previously. Someone with “correctable credit” is much more likely to be approved for future loans than someone without it.

Secondly, and crucially, is applying with the right lender. Most financiers on the market won’t work with applicants with bad credit, even if they’ve taken steps to improve it.

However, there are plenty of specialist lenders ready to provide second-chance finance to those who’ve struggled in the past. It’s imperative that you take the time to find suitable bad credit options to avoid unnecessary enquiries and rejections on your credit file.

When you might look to refinance a car loan with bad credit

There are several situations where you might look to refinance your car loan, including the following:

  • Your credit score and finances have improved: if you’ve been paying off your car loan consistently throughout your term without issue, your credit score will rise. With that higher score, you could qualify for better interest rates and lower fees, potentially saving on your loan deal overall.
  • You want to adjust the length of your loan: another key reason for refinancing is to update your loan’s term to suit your new situation. If it’s improved, this may be reducing your term and paying off your loan sooner, but if you’re facing financial pressure, you can extend your term to reduce the cost of your payments (but increase its overall cost).
  • You want to remove a co-borrower or guarantor: bad credit applicants can benefit from a co-borrower or guarantor being present on their car loan. If your situation has improved sufficiently down the track, refinancing your loan can remove them from the equation.
  • Rates have fallen across the board: if you took out your car loan in a market with rates near their peak and they’ve subsequently fallen, you may wish to refinance to access the improved rate, even if your score isn’t significantly better.

The pros and cons of refinancing your car loan with bad credit

Pros:

  • Access better rates: if your credit situation has improved, you could score a lower interest rate and fees by refinancing.
  • Adjust your loan to your changing needs: whether you’re looking to increase or decrease its length or add or remove another borrower or guarantor, refinancing can help you do this.
  • Access new and improved features: refinancing to a new loan could add flexibility, such as the freedom to make free additional payments.

Cons:

  • More expensive if your score has decreased: not only will you struggle to refinance if your credit score has gone backwards, but you could also end up paying more if you do.
  • Break fees: many car loans come with break fees for paying them out ahead of schedule, which is what refinancing is. This fee could be worth hundreds of dollars in some cases.
  • Extra cost with negative equity: if you owe more on your car loan than it’s worth, you could be left to pay the shortfall out of pocket.

Trading in, paying off and moving up

If you’re now in the “correctable credit” category and still have a bad credit car loan, one option to refinance your vehicle is trading in your financed vehicle and paying off the bad credit car loan in full before applying for a new one.

Individuals with “correctable credit” can opt to upgrade or change their current vehicle. You'll get a new loan and most likely a better interest rate. This is due to lowering your risk and proving you’re a responsible borrower.

What to do if your credit isn’t quite there

If you haven't paid enough debt off to join the “correctable credit” category, you may have sufficient credit to take out an unsecured loan to pay off the car loan in full. 

These loans may come with high interest rates as an unsecured product, but they can be better than certain sub-prime car loan rates. However, without “correctable credit”, you may be refused such a loan due to being a high risk without any security attached to it, such as a car as collateral.

If you're unsure if you can refinance a bad credit car loan, you can get a free, no-obligation quote with Savvy today and find out what your options are for your finance needs.

Common questions about refinancing your car loan

How long does the refinance process take?

The time it takes to refinance your car loan can depend on a range of factors, including the following:

  • The complexity of your profile
  • Your lender’s processing time
  • The age and condition of your car
  • Whether you’re paying a deposit towards the refinance
Does applying for a car loan refinance impact my credit score?

Yes – when you apply for a car loan, you’ll have a hard credit enquiry recorded on your credit file, which can temporarily decrease your score. However, as long as you keep up with your repayments and ensure they’re timely, your score will rise while you pay off your loan.

Will I still be able to refinance if I’m on Centrelink?

There are lenders in Australia who can accept certain Centrelink payments, such as age or veteran’s pensions and single parent payments. However, payments that are conditional on employment such as JobSeeker and Youth Allowance won’t be accepted. Check with your lender if you’re unsure about whether your Centrelink payments can count towards your new loan.

Can I refinance with the same lender?

Yes – you can apply for a refinance with the same lender if you wish to, provided your profile still satisfies their terms and conditions. It’s important to compare your options to see whether there are any on the market that may help you save on your car loan.

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This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.

The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.

Approval for car loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.

The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.

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