If you’re struggling to stay financially afloat due to a burdensome car loan, you may be wondering whether refinancing will help relieve some of the strain on your budget. In many instances, you can save a significant amount of money when you refinance your car loan. This can infuse some much-needed cash into your monthly finances.
If you don’t have the best credit, you may be wondering if that will impact your ability to refinance your auto loan. The good news is that your credit score is not the only factor used by lenders when determining whether you qualify for car loan refinancing, and it may be possible to refinance if you have bad credit. However, the stronger your credit score, the better your likelihood of qualifying and the better terms you are likely to be offered.
There is no minimum credit score required to refinance a car loan. That being said, there is a range that is considered a “good credit score” to refinance a car loan. In general, a credit score over 700 will unlock the best interest rates, and a credit score between 660-700 will give you access to standard rates.
It’s still possible to qualify for car loan refinancing if your credit score is significantly below 660. Since there are other factors used to determine whether a lender will approve you for refinancing, you may be able to make your application stronger by stacking up favorably in these other criteria.
Lenders look at a variety of factors when evaluating your refinance application. Based on your overall borrowing profile, they will determine whether you’re deemed a good risk and if so, what kind of terms you qualify for.
Your credit score is one of the most important factors used to determine whether you qualify for car loan refinancing. Credit scores are divided into five ranges:
The higher the tier your credit score falls into, the better your chances of receiving the best possible interest rates and the most favorable terms. However, you’re not out of luck if your credit score falls into one of the lower tiers. The other factors evaluated by lenders may help you refinance a car loan even with poor credit.
Lenders want to be confident that you’ll be able to make your monthly payments for the lifetime of your loan. You’ll need to verify that you have a steady source of income by presenting documents such as a pay stub or W2 form to the lender when you apply.
In addition, lenders will look at your debt-to-income ratio (DTI). This metric evaluates your ability to take on new debt by detailing the percentage of your income currently committed to paying down existing debts. Your DTI considers all your monthly debts, including:
You can calculate your DTI by dividing your monthly debt payments by your gross monthly income. For example, if your monthly debts are $2,000 and your monthly income is $5,000, your DTI will be 40%.
As with your credit score, there is no minimum DTI that will ensure you qualify to refinance your auto loan. However, the better the ratio, the more likely you are to receive favorable terms.
The value of your vehicle also matters when applying to refinance a car loan. Auto loans are secured loans, which means that your vehicle is used as collateral. In the event that you default on your loan payments, the lender will repossess your car and sell it to recover the outstanding balance on your loan. Therefore, lenders will want to know that your vehicle is worth more than the amount of your loan.
Lenders will use a figure called the loan-to-value ratio (LTV) to assess the value of your vehicle. The LTV compares the amount of your loan to the value of your vehicle (which is impacted by factors such as the year, condition and mileage). You can calculate your vehicle LTV by dividing the total loan balance by your vehicle’s current value. For example, if your loan balance is $15,000 and your vehicle is worth $20,000, your LTV is 75%.
There is no minimum loan-to-value ratio that lenders look for. That being said, the lower the better. In general, having an LTV below 100% will help you secure more favorable terms.
Because lenders evaluate all the factors discussed above, there is no target credit score you need to shoot for in order to refinance. Your total income, debt-to-income ratio and loan-to-value ratio can help make up for a poor credit score. In general, you will need a higher credit score to qualify for refinancing if your DTI and LTV are also high. Conversely, when these scores are lower, you are more likely to be able to refinance with a lower credit score.
In addition, a lower credit score is typically less problematic if your income is greater than $75,000. This is due to the fact that a large income generally makes it easier to afford new debt.
If you have a low credit score or a poor DTI or LTV, you may struggle to either get approved for refinancing or to qualify for the best terms from a lender. Fortunately, there are steps you can take to increase your odds of getting approved and unlocking the best rates.
Your credit score is one of the most important criteria evaluated when you apply to refinance your car. Therefore, you should take the following steps to try and boost your credit score prior to refinancing:
You can improve your DTI in two ways:
For many people, it may be difficult to achieve a significant bump in their monthly income. However, you can prioritize paying down some of your other debts in order to get your debt-to-income ratio as low as possible.
There are several ways you can lower your LTV:
If you have a low credit score, you may want to have a cosigner on your refinance application. Having a cosigner with good credit can help you qualify for refinancing and potentially unlock better rates. Just keep in mind that while you’re still responsible for paying the new car loan, your cosigner will become responsible if you fail to make your payments.
If you’re considering refinancing your car loan, iLending’s unique You First Approach™ makes the process easy and hassle free. You’ll work with a dedicated personal loan consultant who will get to know you and understand your specific goals for refinancing. Your loan consultant will then compare rates from over 50 nationwide lenders in order to determine the best solutions that address your goals. After reviewing these options with you and recommending the ideal solution for your needs, your loan consultant will guide you through the application process to ensure it is completed properly.
On average, iLending clients save $145/month from refinancing their car loan. This equates to significant savings that can allow you to break free from the financial burdens you’re currently experiencing.
Apply now to get the car loan refinance process started.