Auto refinancing with bad credit can be a challenge because lenders are reluctant to extend new credit to borrowers who have a history of dishonoring debts. Despite the difficulties that many borrowers face, there are some measures that borrowers with bad credit can take to help improve their chances of obtaining a new auto loan. These include finding a co-signer, paying down balances on other credit accounts, or procuring a loan from a company who works with people with bad credit.
Many lenders allow loan applicants to have co-signers even if the co-signer has no ownership interest in the vehicle being refinanced. The lender checks the credit report of both the primary applicant and the co-signer, and in many instances lenders average out the credit scores of both people when underwriting the loan. Auto refinancing with bad credit is much easier if a willing co-signer can be found.
Credit scores are based on a number of factors that include past management of debts and current loan balances. Prior to submitting an application to refinance an auto loan, a loan applicant can improve a credit score by paying down the balances owed on other credit accounts, such as credit cards or unsecured loans. Credit scores are normally updated once a month, so the benefits of paying down debts may not be visible on a credit report for a couple of months.
Lenders are not required to check the credit reports of loan applicants or to submit monthly reports to credit reporting agencies that detail the borrower's account activity. Some lenders save money by neither checking credit reports nor submitting information to credit bureaus. Auto refinancing with bad credit is no problem at a company that does not take credit reports into consideration when writing loans. Due to the risks involved in lending to people without checking credit scores, lenders that do not check credit usually charge higher rates than other lenders.
When borrowers fall behind on car payments, the lender can repossess the financed vehicle and sell it to raise money to payoff the debt. Cars do not hold their value over long periods of time and repossessed cars often sell for less than the balance owed, which means that lenders have to take a loss. Auto refinancing with bad credit is sometimes possible if the existing lien holder agrees to allow a financially challenged borrower to refinance an existing loan into a more affordable low rate loan to reduce the likelihood of the existing loan going into default.