How to Refinance Bad Credit Loans

By Angela Monroe - September 13, 2019

Have you taken out loans with astronomically high interest rates and now struggles to catch up with the repayments? Has your credit profile improved since the last time you seek financing? You can refinance bad credit loans to get out of the burdening debt.

You may have taken the old loans when you have bad credit and desperately needed financing, but your credit profile and financial situation have improved after a year or two of responsible management. These positive developments in your credit and financial standings can help you help qualify for standard loans that carry lower interests and better terms.

Bad Credit Loan Refinancing

Refinancing a bad credit loan is getting a new loan from a new lender to pay off the old one. You can either get the money from your new lender and pay off the old loan yourself or your new lender can settle off your old debt then you will make your monthly repayment to them.

While refinancing can change the interest rate and terms of your loan, your loan balance and collateral do not change. This is unless you to take on more debt while refinancing and refinance into a personal unsecured loan.


Save Money of Lower Interest Cost. The most common reason for refinancing bad credit loans is to take advantage of the lower interest rates provided by the new loans. This is especially beneficial if your old loans have long terms. 

Pay Off a Loan That’s Due. If you don’t have the funds to pay off a loan on its due date, refinancing can solve your problem. This helps a lot if you have a loan with a balloon payment, which requires a large lump-sum payment. 

Lower Payments. The lower interest cost of your new loans can translate into lower monthly payments. This is especially beneficial if you want to preserve your cash flow and spend within your monthly budget. Also, refinancing usually means a time extension for repayments. Your loan repayment will be stretched out over a longer period, causing your monthly repayment amount to decrease. 

Shorten the Loan Term. While extending repayment is more common in bad credit loan refinancing, you can also refinance to a shorter-term loan. While this shortened period can cause your monthly payment to go up, you can save more in interest over the life of your new loan. This step is especially beneficial if you have a 20-year home loan, for instance, and want to refinance to a 10-year home loan with a lower interest rate. 

Change the Loan Interest Type. You can change the interest rate type of your loan from variable to fixed or vice versa when you refinance. A loan with a variable interest rate changes its interest according to the market conditions. A fixed interest rate loan, meanwhile, charges you the same interest for the life of the loan. 

Some Drawbacks

While refinancing can help you get out from a high-interest financing, it also has a few disadvantages that you should be aware of.

Refinancing Fees Can Be Expensive. The transaction costs may be high with plenty of fees to be paid, like processing and origination fees, as well as a closing fee for home loans. 

Costly in the Long Run. While you can enjoy lower monthly payments from an extended repayment period, you will be paying more in interest because you will be spending a longer time paying off your loan.

Some Benefits May Be Lost. You may benefit from the fixed interest rate of your old loan than the variable interest rate of your new loan, which can temporarily give you a lower interest rate but can also skyrocket and cause you to pay more.

Easy Steps to Refinance Bad Credit Loans

If you think refinancing is for you, it’s best to be informed of what you’re getting and what you need to prepare throughout the process.

1. Get an estimate of your refinancing costs.

If the benefits of refinancing the loan subdue its costs, then it is a financially smart move to take. Before going to any lender, get an estimate of how much money you’ll spend and how much you’ll save.

You can find many free refinance calculators online. Use one to calculate the refinance costs you’re likely paying based on your new loan’s amount, interest rate and terms. Many of these provide an estimated calculation of your new monthly payment and monthly and lifetime savings.

2. Prepare your credit record.

Before you decide to refinance bad credit, make sure that your credit profile has improved so that when your potential lender pulls out your credit record from the credit bureaus⁠—-an action that gets recorded on your profile and temporarily causes your credit score to drop⁠—they will like what they see and decides to approve your application.

Request a copy of your credit report. Review and verify all the information that it contains and make sure that everything is correct and factual. If you notice any typo or wrong entries that can affect your credit profile in a negative way, send a dispute letter to the involved credit reporting bureau detailing your concern. This process involves investigation and can take several weeks or more, so it’s best to do it early.  If successful, the wrong entries will be corrected or removed from your credit report and your credit score eventually improves.

If you have any past due accounts or loan defaults, settle them all if you can. Your history of debt payments is the most influential factor in deciding your creditworthiness. Refinancing is of little use if your credit profile continues to reflect poor credit management. A good credit profile reflects high creditworthiness, helping you get approved for loans fast and get low interest rates. 

3. Get pre-approvals and quotes from several lenders.

After making sure that your improved credit profile can help you refinance with a favourable interest rate and terms, it’s time to do loan shopping. You can contact various types of lenders that offer to refinance, from banks to fintechs and online lenders. Inquire about all the available options and gather quotes from different lenders. Then, compare each refinancing offers on the differences in interest rates, loan features and associated fees. This will help you settle for the best deal.

Remember to do your loan shopping in a short period, ideally within two weeks to 45 days, to avoid damaging your credit score. Every time you seek a pre-approval from one lender, your credit report is pulled from the credit bureau and this is recorded in your profile. Several “hard inquiries” negatively affect your credit score because they suggest that you could be in financial trouble because you’re trying to apply for many loans at a time. However, all loan inquiries made within two weeks are recorded as one.

4. Submit the necessary documents

Once you’ve chosen which lender to get refinancing from, prepare all the necessary financial documents. It is also wise to gather these documents early even before your lender asks for them. This will help expedite the process of your refinancing application.

The common documents needed in refinancing applications include your most recent:

  • Personal tax returns
  • Business tax returns for business owners
  • Bank statements
  • Proof of identification

Follow-up documents may be required once your initial application documents are reviewed. 

5. Read the fine print.

Before affixing your signature on any loan contract, do not forget to review the terms and conditions of your new loan. Do not hesitate to clarify any information that confuses you. Proceed only with the refinancing agreement if all the terms and conditions are clear and agreeable to you.


Refinancing bad credit can be time-consuming and complicated, but the journey can be incredibly rewarding. Get proactive and prepare ahead of time; seek help from a financing expert if you need to. This helps simplify and speeds up the process for you. 


Loans For People With Bad Credit helps people with bad credit get financing. We team up with over 30 different lenders to match you up with the right loan you need. Talk to one of our consultants on 1300 769 384 or fill out our Loan Pre-approval application form.


See also:

A Borrower’s Guide to Unsecured Bad Credit Personal Loans

5 Easy Steps to Get Out of a Bad Car Loan

How Soon Can You Refinance a Car Loan With Bad Credit?

Angela Monroe
Angela Monroe is the Community Manager at The Positive Group, specialising in giving people the information that they need when they need it, and putting you on the path to a fair financial future. She has 8 years of experience in helping Australians find the right finance solutions, and regularly contributes articles to empower Australians with the knowledge they need to become financially healthy.


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