What Is Bad Credit?
First, you’ll want to do some damage assessment on your credit score to figure out where you stand. This requires an understanding of how credit bureaus define score ranges.
Credit bureaus typically use one of two main scoring paradigms: FICO and VantageScore. Both use ranges of 300 to 850, with lower scores reflecting lower creditworthiness. According to Experian, FICO scores of 669 or less are considered “bad credit.” On the VantageGuard scale, “bad credit” begins at 660 or less. You may still qualify for loans with scores in these ranges. However, the rates and terms you’re offered with reflect the elevated risk you pose to the lender.
What Is Refinancing?
When you refinance, you take out a new loan to cover an existing loan. The new loan should offer some kind of financial advantage compared to the loan you’re replacing. It will also pay off your existing loan’s remaining balance, terminating it. You then become responsible for paying back the new loan.
Consumers can refinance all kinds of loans, from mortgages to credit card debt. Some lenders specialize in refinancing plans. These include legacy financial institutions such as banks as well as innovative fintech alternatives.
The Benefits of Refinancing
Refinancing your car loan can benefit you financially in numerous ways. First, you could take the opportunity to secure lower interest rates. Perhaps your still-imperfect credit score has improved since you took out your initial loan. Overall market rates may have fallen. Other financial indicators like your debt-to-income ratio may have improved. These and other general conditions all boost your likelihood of securing a better rate.
People also refinance to reduce their monthly payments. This may involve extending the loan term or paying a little more interest over the loan’s lifespan. However, the financial flexibility that lower monthly payments deliver is often worth it. You can invest the extra money or use it to avoid taking on more expensive debt. It might also just give you some much-needed financial breathing room if you’re on a tight budget.