Millions of people refinance their loans to get better interest rates, to pay off other debts, to lower their monthly payments, or to reduce the risks associated with their loan terms. If you’ve got a big loan and you’d like to change the terms, refinancing may be your only option. However, it’s not always easy for those with bad credit to find good terms. We’ll give you some tips on your options if you have a less-than-desirable credit score.
The term “refinancing” refers to the practice of applying for a loan to replace another loan, secured with the same collateral. It’s most often done with mortgages, although it can also be done with educational loans, auto loans, and even credit card debt. Most often, people refinance to get better terms on their new loan than they had with their old one—a lower interest rate, for example, or a lower monthly payment. People also refinance in order to change from a variable-rate loan, in which the interest rate can fluctuate, to a more stable fixed-rate loan.
Refinancing can make a heavy debt bearable for those whose financial circumstances have changed since they took out the loan. However, it’s not always the best option. Some loans have penalties associated with early payment—you should only refinance if it can give you significant savings.
Getting better rates on your new loan is tougher if you have bad credit—especially if your credit score is worse now than it was when you took the loan out. The good news is that if you have bad credit, that doesn’t mean you can’t refinance. Many lenders out there are willing to take on borrowers with low credit scores—yours is a profitable market, after all, if slightly more high-risk than someone with spotless credit. Here’s what to do:
Review your credit score. Make sure you know what the lenders are seeing when they look up your credit history. You are allowed by law to get access to your credit score once a year at no charge from one of the three main credit reporting agencies in the country. To get your credit score, you don’t have to contact all three—you contact a central address, and they get your credit score from one of the three companies. To apply for a copy of your credit history, go to annualcreditreport.com, call 1-877-322-8228, or mail a written request to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. To do this, use the Annual Credit Report Request Form, which you can download at http://www.ftc.gov/credit/.
Once you have your credit report, check it over for any mistakes—these happen more than most people realize. If you have a dispute, get it taken care of before you talk to lenders, if possible.
Get your story together. Never underestimate the human element. You’ll be speaking face-to-face with lenders, so make sure you present the reasons why you have bad debt in a positive light. It’s fine to be honest about your past problems, but make sure you leave the impression that you’re doing everything you can to turn the situation around. Many lenders will be willing to work with you to decide on terms that both of you can live with.
Meet with several different people. It’s often best, if you have bad credit, to meet individually with lenders instead of filling out online forms. Go to several different financing agencies and compare offers before accepting. Make sure you ask detailed questions about any fees, penalties, and other charges associated with your refinance—you don’t want any surprises later.
Negotiate. Once you have several offers together, go to your most promising lenders and negotiate terms. Nothing is set in stone until you sign on the dotted line, so use your leverage while you can. If possible, inform lenders that you’re shopping around and ask them to improve upon other offers you’ve received.
Consider sub-prime lending. If you have a credit score lower than about 600, you may need to go to a financial institution that specializes in sub-prime lending. These companies have loans designed for those with low credit scores, and in extreme cases, they may be your only option.
Refinancing isn’t impossible for those with low credit scores—although it is more difficult. Still, with the patience to shop around, skillful negotiating skills, articulate storytelling, and the knowledge of your own credit history, you should be able to find a refinancing deal that works for you.