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How To Refinance A Car Loan With Bad Credit

If you're ready to make a change to your current auto loan, refinancing might be the right choice for you, even if you have bad credit.

In fact, learning how to refinance a car loan with bad credit is simple with this comprehensive guide. Keep reading for a few steps you can take to improve your credit score and get more favorable loan terms for refinancing.

If you feel that refinancing is right for you, call the Credit Union of Southern California (CU SoCal) today at 866.287.6225 to schedule a free consultation with one of our experts to see how our auto loans and other financial products can help you out.

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Can You Refinance A Car Loan With Bad Credit?

Refinancing a car loan with bad credit is possible, but it may not be as straightforward as you would like. If you're considering refinancing, your original loan probably didn't have the best interest rate. And if your credit score isn’t great, obtaining better loan terms could be a challenge.

A low credit score means your new loan options will likely have less than ideal terms and relatively higher interest rates. You should probably only consider refinancing your auto loan if you can find a new loan with a lower interest rate. Otherwise, refinancing could be worse for your financial situation than sticking with your original loan.

How Does Refinancing A Car Work?

Refinancing a car is when you pay off your current auto loan with a new loan. First, you'll apply for a new loan from a lender, and once approved, you'll receive the amount as a deposit in your account or as a check.

You'll then immediately pay off the existing loan. Now, you have only the new loan to make monthly payments on. Depending on your new loan terms, you could see a lower interest rate or lower monthly payments. For more information on refinancing, check out our guide on How to refinance a car.

Why Is Credit Important?

Your credit score has a pretty significant impact on what type of loan terms you qualify for when refinancing. Whether or not you can refinance a car loan with bad credit largely depends on your creditworthiness, which factors in more than just your credit score. Creditworthiness also takes into account your repayment history, your capacity to meet future financial obligations, and your capital. The better your creditworthiness, the more money the lender will be willing to allow you to borrow and at what interest rate.

How Does Credit Scoring Work?

Understanding how credit scoring works is a great first step to getting a loan, and it's especially vital if you're wondering how to refinance a car with bad credit. Essentially, your credit score is based on your credit history, current debt, payment history, and types of credit you have.

Credit History Length

The Length of your credit history accounts for about 15% of your FICO credit score. This component keeps track of how long you have had your credit accounts. The longer your accounts have been open, the clearer the picture of your credit management.

Therefore, keeping your accounts open—even if you’re no longer using them—is usually a good idea, especially if you’re credit score isn’t where it needs to be. Additionally, having a strong credit history will make it easier to obtain financing in the future, as lenders will have a better idea of your ability to repay your debts and make on-time monthly payments.   

Credit Inquiries

Credit checks can affect your credit, but don't worry; they only account for around 10% of your credit score. However, suppose you're shopping different lenders and have several credit inquiries done by various institutions within a short time frame. In that case, they will generally only be counted as one request.

Debt Burden

Your debt burden, also known as "accounts owed", makes up 30% of your credit score. Basically, this is the current debt you have, including any loans and credit cards. Having a lot of debt isn't necessarily bad for your credit score, as long as your payment history (which we'll talk about next) is satisfactory.

Payment History

Payment history makes up the most significant chunk of your credit score at 35%. If you are consistently making on-time payments for your current debts, you won't see your score knocked down. However, if you have a history of late payments or no payments, your score will drop, and lenders will see you as a considerable risk. This means less than favorable loan terms and higher interest rates – if you're approved for a loan at all.

Types of Credit

The type of credit accounts you have only makes up 10% of your FICO credit score, but don't dismiss it right away. Having a wider variety of credit signals to lenders that you have a good understanding of debt and how to manage it. Types of credit include mortgages, personal loans, and credit cards. The more varied your credit accounts, the better your score will be.

Refinancing a Car Loan With Poor Credit

If you need to refinance your car loan with bad credit, there are a few steps that you need to go through if you want the best new loan terms. You'll need to check your current credit scores and financial situation before you can begin searching for a new loan that will fit your circumstance.

Once you find a lender, make sure you understand what the new loan entails and how it will affect your finances going forward. Here's a detailed, step-by-step guide for refinancing a car loan with bad credit and late payments.

1.Check Your Credit Scores

Before applying for any kind of loan, you should have a look at your credit score. Making sure there are no errors on your score will not only make refinancing easier but will speed up the process as well. Once you know your score, you'll have a better idea of whether or not refinancing even makes sense for you.

2.Take Steps To Improve Your Credit

If your credit score isn't entirely where you'd like it to be, it's time to take some steps to improve it. There are several ways to do this, like making on-time monthly payments, increasing your debt to income ratio, and more. You can also check out the CU SoCal Credit Builder Loan, a loan designed to help you quickly improve your credit score.

3.Gather Necessary Documents

Now that you have a good idea of where your credit score stands and have taken steps to improve it, it's time to collect the documents you'll need to apply for refinancing. Here's what to gather:
  • Proof of identity
  • Driver's license
  • Proof of income
  • Proof of residence
  • Vehicle registration and information (including make, model, and VIN)
  • Credit and banking history
  • Proof of insurance
  • Information for your current loan
 Making sure this information is complete and accurate will speed up the application process.

4.Contact Current Lender

Before you start looking around at other lenders, you should contact your current lender and see if there's anything they can do for you to get better terms on your loan. If you've raised your credit score by making on-time payments, they might be willing to refinance for you.

5.Shop Different Lenders

Whether or not your current lender is willing to refinance your car loan, you might still want to shop around. As you inquire at banks, credit unions, and online lenders, keep track of quotes the lenders offer so you can compare them and make the best decision.

6.Read New Loan Terms Carefully

Once you've chosen a lender for your new loan, make sure you read the new loan terms carefully. If there's anything you don't understand, don't hesitate to ask the lender what it means for you and your financial situation. The better you know the loan terms, the more likely you are to pay it off successfully without damaging your credit score.

7. Close the Deal

With your new loan offer in hand, it's time to close the deal! This process is essentially the same as when you financed your original auto loan. Once the lender approves your application for the loan, setting up automatic payments can be a great way to stay on top of your debt.

Should You Refinance Your Auto Loan?

Before you decide to refinance your auto loan, you should understand when it makes sense to do it. It isn't always necessary, especially if your original terms are pretty good. Here are some times when you might want to think about refinancing your car loan:
  • Your credit score has improved
  • You've found a new loan with better terms
  • You have an emergency
 If you decide that refinancing is right for you, you should still understand all the Pros and cons of car refinancing.

Where to Refinance Your Auto Loan

When you begin shopping for different lenders, you might get easily overwhelmed by all of the options as you ask “who will refinance my car loan with bad credit?” We’ve gathered a list of the best places to check for refinancing an auto loan, including banks, credit unions, and online lenders. Here's what you need to know about them.


Banks are usually the first place to look for a loan and are a great option for refinancing. Chances are you already have an account with a bank, so borrowing from the same institution just makes sense. They'll have access to some of your financial information so you can streamline your paperwork gathering.

Credit Unions

Credit unions are a great option for refinancing with bad credit. They are owned by their Members, so the focus isn't on profit. 

The one downside to borrowing from a credit union is that you will have to satisfy specific requirements to become a Member. Don't worry, though; joining is often much easier than you might think. At CU SoCal, we offer Membership to those living, working, attending school or religious services in Los Angeles County, Orange County, Riverside County, and San Bernardino County.

Online Lenders

Online lenders are becoming more and more popular for refinancing due to the ease of application, quick approval, and their robust online services. However, if you’re the type of personal who prefers face-to-face communication and personalized service, online lenders may not be the best option.  

CU SoCal Auto Loans

CU SoCal prides itself on offering competitive auto loans to our Members. With financing up to 120%, competitive rates, fast approvals, and zero fees for Members, CU SoCal auto loans are right for just about everyone.

Apply For a CU SoCal Auto Loan Today!

If you're ready to refinance your current auto loan, CU SoCal is here to help. Our competitive rates and flexible terms will help you get on the road in no time, no matter your credit score.

Give us a call today at 866.287.6225 for more information on what makes us a great choice for auto loans, or if you’re ready, apply online today!

Get Started on Your Auto Loan!

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Credit Union of Southern California (CU SoCal) is a leading financial institution empowering those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County to reach their goals and build strong financial futures. CU SoCal provides access to convenient money management services and offers competitive rates and flexible terms on auto loans, mortgages, and VISA credit cards—turning wishing and waiting into achieving and doing.


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