How to Refinance a Car Loan With Bad Credit

If you’ve bad credit can you still refinance your vehicle? If, for whatever reason, you are considering refinancing your car loan, Canstar can help. Find out how to refinance your car loan, and if it’s worth it if you have bad credit.

In this article we cover:

What is bad credit?
How does bad credit affect my loan?
Can I refinance a car loan with bad credit?
What is refinancing a car loan?
When should I refinance my car loan?
Does refinancing a car loan hurt my credit score?
How do I refinance a car loan?
Do I have other options?

What is bad credit?

Most adults in New Zealand will have a credit score. A credit score is a number between 0 and 1000 and is based on your financial history. It tells a lender how credit-worthy you are.

If the bank lends you money, will you pay it back?

That’s the main question being asked. If you have a bad credit score, it’s not that you’re a bad person that wants to run away with unpaid loans. It’s just maybe you have struggled to meet your payment obligations in the past.

While there are no universal numbers for what makes good or bad credit, the average credit score in New Zealand is between 650 and 768, according to credit bureau Centrix. Anything above this may start to be looked at as ‘good credit’ and anything below may begin falling into ‘bad credit’ territory.

How does bad credit affect my loan?

Never fear! If you have bad credit, you can likely still secure a loan. While some lenders may say no, many will still be willing to lend to you. The catch is that, usually, the interest rate you pay will be much higher. You may also face stricter terms. A bad credit score can make you look risky, so a lender will want to maximise their chance of return.

Can I refinance a car loan with bad credit?

The short answer is…yes! But it may not be worth it…

As mentioned above, you may be restricted in your choices, or be offered unfavourable rates, but you will usually be able to refinance your car loan even with bad credit. There are even certain lenders who specialise in lending to those with bad credit scores.

Wait, what is refinancing a car loan exactly?

Refinancing is, essentially, taking out a new loan to pay off an existing one. This is usually done because the new loan has better terms than your existing loan. An example is easiest here:

• You took out a car loan of $10,000 with an interest rate of 11%. You have paid off $5000 leaving you with $5000 left to pay
• Another lender is now offering an interest rate of 7%, so you apply for a $5000 loan with the new lender
• You then use that loan to pay off the remaining amount on your original loan
• You then continue making repayments on the new loan, only now you are paying 7% interest instead of 11%

When should I refinance my car loan?

Well, this really depends on why you’re wanting to refinance in the first place. Some reasons may be:

• Your credit score is bad but not as bad as it used to be
• You want to reduce the cost of your monthly repayments
• You want flexible payment options
• The current market interest rates are lower and you feel you can get a better deal 
• You need an injection of cash

If your credit score has actually improved since you got the original loan, you may be able to secure lower interest rates. Even if your credit score is bad, maybe it’s not as bad as it used to be? The market may have also changed. If the interest rates on offer are significantly better than when you got your loan, it could be worth it, regardless of credit score.

Another reason may be that you’re struggling to keep up with your monthly payments. In refinancing your car loan you may be able to secure a longer-term loan. Spreading out the loan can help make those monthly payments more manageable. Do note, You’ll be paying interest for longer, and the overall cost will be more.

Maybe you have the opposite problem. You’ve come into some extra money but your current loan doesn’t allow you to pay more than the set amount. Some lenders allow flexible payments, so we can pay lump sums when able.

If you are looking to refinance your car to get some needed cash, yes, it is possible. For example, if your car is worth $12,000 and your loan is at $8000 you may be able to leverage the equity and secure a $4000 cash loan. 

Does refinancing a car loan hurt my credit score?

Refinancing your car loan is unlikely to have a significant impact on your credit score. But It probably will have some impact.

When you apply for a loan, the lender will look into your credit history. This process is called a hard inquiry. Each time a hard inquiry is done it can cause a small dip in your credit score. When shopping around for the best deals you may inquire with multiple lenders. This means multiple hard inquiries in quick succession are unavoidable. 

Because of this, these dips are usually minor and are more or less temporary. If you have multiple inquiries for different loans and over a longer period of time, this may cause a more significant dip.

Additionally, when you do get the new loan, it will be seen as more debt. This may negatively impact your credit score. However, if you start meeting all your payment obligations, it could quickly start to make your credit score look better. If you don’t, well then you may be worse off than when you started.

While refinancing itself may have some impact on your credit score, it’s more about how you handle your new repayment obligations.

So how do I refinance a car loan?

Well, this really isn’t too different from how you go about getting any loan.

Check your credit reports and credit score

It’s important to be prepared. Take a look at your credit and see how your finances are looking. Has it improved? Are there any discrepancies or incorrect information? Is there anything that you might be questioned about? In New Zealand, there are several companies that make checking your credit score easy.

Shop around

This goes without saying. Whether refinancing your car, purchasing a new TV or even setting up wi-fi, shop around. The best way to find the best deal is to look at all your options. 

Read the fine print

Your current lender and/or new lender may have hidden costs, fees and limitations. This means you could be worse off even if the new loan looks better on paper. A lower interest rate isn’t the only thing to consider.  

Do I have other options?

If you do have bad credit, your options are not always great. So it pays to think about what options you do have. Before refinancing your car loan, think about:

• How can I improve my credit score before refinancing?
• Can I borrow from a family member?
• Can I secure a guarantor loan?

If you can improve your credit score before refinancing, your lending options will be more favourable. While not all methods may be feasible, this can be done in a number of ways:

• Pay your bills on time
• Think carefully before applying for any new credit
• Pay down any existing loans and debts
• Consider seeking the assistance of a financial counsellor
• Check your credit report for any inaccuracies
• Hold onto credit cards you can manage
• Lower the limit on your credit cards

→ Related article: How Long Does It Take to Fix a Poor Credit Score?

Borrowing from a family member has the added benefit of not paying interest (well, maybe… that’s up to them). Make sure you can pay back whatever you borrow and have a clear agreement about what is expected in terms of repayments. No one wants an awkward situation come next family gathering.

A guarantor loan means if you fail to meet the repayments, your lender will turn to your guarantor. This person is like an insurance policy for the lender. If you can’t pay the loan, your guarantor will. If your guarantor has great credit, it can help you get better loan terms.

Ask an expert

If you’re unsure whether refinancing a car loan with bad credit is a good idea, don’t be afraid to ask for help. There are plenty of services out there that offer some great advice.

You can contact MoneyTalks, a free financial helpline for advice and support from trained financial mentors. MoneyTalks can also connect you with services in your community.

Compare personal loans with Canstar

About the author of this page

This report was written by Canstar Content Producer, Andrew Broadley. Andrew is an experienced writer with a wide range of industry experience. Starting out, he cut his teeth working as a writer for print and online magazines, and he has worked in both journalism and editorial roles. His content has covered lifestyle and culture, marketing and, more recently, finance for Canstar.