Can You Refinance a Loan if You Have Bad Credit?

LOS ANGELES, February 17, 2021 (Newswire.com) - Paying high interest rates on a loan or mortgage makes getting out of debt a much longer process. Total debt is one of the primary variables in the calculation of your FICO score. There's a catch-22 at work here which far too many consumers fall prey to.

Let's look at it from another perspective. Borrowers with bad credit pay higher interest rates when they first take out a loan. That doesn't mean it has to stay that way. After making several payments on time, the borrower, even with a poor credit score, can refinance. Learn more about how to refinance a loan and how to get a loan with bad credit.

Refinancing a personal loan when you have bad credit

There are a few good reasons to refinance a personal loan. One is to extend the life of the loan and lower your monthly payments. Another reason is to lower your interest rate. You can also refinance the loan to a shorter term to pay it off faster and pay less overall interest.

Lenders may check your credit score when you apply for refinancing. If it's higher than when you were approved for the original loan, there's a good chance you'll be eligible for a lower interest rate and more flexible payment terms. You'll want both if you can get them.

When the new loan is approved, the first thing the lender will do is pay off your old loan. This is an additional step in improving your credit score, because the lender often report it as "paid in full" to the credit bureaus." You'll then start making payments on the new loan.

Refinancing an auto loan when you have bad credit

High-credit risk auto loans are generally issued by financial institutions that specialize in them. There are a number of these out there. Their interest rates are higher, but they're more flexible on approvals. These lenders make it possible for folks with bad credit to get the vehicles they need.

After making payments for a year, it's recommended that borrowers visit their local lender to ask for refinancing. Similar to personal loan refinancing, the lender will want to see improved credit scores. If that's the case, you should be able to get a better rate.

Refinancing a mortgage when you have bad credit

Mortgages are a slightly different animal. The minimum FICO score that a bank will approve a new mortgage is typically 620, but you can get refinancing if it's as low as 580. It's not impossible if you're below that, but it is extremely difficult and interest rates will still be high.

Continuing to make mortgage and credit card payments on time will gradually improve your credit score, so it's best to wait until the numbers look good before applying for refinancing.

You might also qualify for FHA Streamline Financing. This is exclusive to FHA mortgages issued by the US Federal Housing Administration. If mortgage payments are current, and your payment history is good, FHA may allow you to refinance to get better terms.   

Debt consolidation loans for people with bad credit

When it comes to interest rates, credit cards typically charge the most. If you have substantial credit card debt, it's in your best interest to refinance credit card debt with a debt consolidation loan. These are offered by most banks, credit unions, and various online lenders.

Consolidation loans are exactly what they sound like. You consolidate all your credit card balances into one lump sum and borrow the money to pay them off. Personal loans typically have lower interest rates than credit cards, even for those with bad credit.

Notice: Information provided in this article is for informational purposes only. Consult your financial advisor about your financial circumstances.

Source: iQuanti, Inc.