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When Should You Refinance a Bad Credit Loan?

Written by
Alex Huntsberger
Alex Huntsberger is a personal finance writer who covered online lending, credit scores, and employment for OppU. His work has been cited by, Business Insider, and The Motley Fool.
Read time: 5 min
Updated on April 22, 2024
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Having bad credit means having fewer financial options than a person with good credit. The lack of options is even more restrictive when seeking a loan.

People with excellent credit have access to a wide range of personal loans. People with poor credit have limited options.

In all likelihood, the ones with poor credit will be stuck with a bad credit loan with an Annual Percentage Rate (APR) much higher than the annual rate for a standard loan.

However, not all bad credit loans and no credit check loans are the same. Some have reasonable rates and manageable payments, while others can trap you in a dangerous cycle of debt.

If you take out a bad credit loan, you will probably be given the option to refinance your loan at some point before it is fully paid off. Here's what you need to know to determine whether refinancing your loan is a responsible financial decision or a gateway to unmanageable debt.

Just what is refinancing, anyway?

Refinancing means paying off your old loan by taking out a new loan, ideally with better payment terms or lower interest. Refinancing offers are fairly common with long-term installment loans.

Let's say you are two years into paying off a three-year, $5,000 installment loan. Your APR for the loan is 20 percent, and your monthly payments amount to a little over $185 per month. After two years of payments, you have paid approximately $1,500 in interest and have a remaining balance of $2005.

You receive an offer to refinance your loan and decide to take it. Your refinanced loan also has a two-year payment term and an interest rate of 15%. Your new monthly payment is only $90.00. As a result, your monthly payment will decrease, and the interest generated on your balance will be less. However, the loan repayment period will be extended by one year compared to the original term of your loan.

Often when people talk about refinancing loans, they aren’t referring to short-term loans like payday loans or title loans, but longer-term loans, like student loans and mortgages. However, shorter-term bad credit loans can have some level of flexibility.

Payday loans aren't refinanced, they're "rolled over."

First of all, don’t take out payday loans. But let’s say you already have. Can you refinance it?

Short answer: No.

Long answer: The payment terms for payday loans tend to be two weeks long. In that time, you must pay back the loan, with fees and interest. Unless you have an unusually friendly payday lender, and you almost certainly won’t, they are not likely to let you refinance for better terms.

However, if you are unable to pay your loan on time, it doesn't mean you’re out of options. It just means that the available options are not ideal.

Depending on whether or not it's legal in your state, which should be your first big clue, your payday lender might give you the option of paying a fee to "roll over" your loan. When you roll over a loan, you basically pay only the interest that is owed and, in return, you have more time to pay the loan off, as well as more interest.

Let's say you have a two-week, $300 payday loan with an interest fee of $45. To roll it over, you would pay the $45 in interest and receive another two weeks to pay the loan off with an additional $45. So instead of owing $345 to the lender, you will now pay them $390 in total. With just one rollover period, the cost of your loan has doubled.

Oh, by the way, the APR for that payday loan? It's 390%.

A high APR might not seem like a pressing issue when your loan is only two weeks long. However,  the more you roll it over, the more worrying that APR becomes, not to mention more expensive. Moreover, if you're having trouble paying your payday loan now, you will probably have a tough time paying it two weeks later, especially with the additional rollover fee.

Installment loans for bad credit can usually be refinanced.

In the long term, bad credit installment loans will not only offer you the option of refinancing, but they can be a good financial decision. These loans have much longer payment terms than payday loans, usually a year or more, and they often have lower APRs. If you're able to refinance and lower your payments, the relief it could provide to your budget might be worth the additional interest payments in the long term.

Whether or not they’ll be willing to refinance the loan will likely vary from lender to lender, so it’s always important to do your research before taking out a loan. Look at the lender’s website and terms thoroughly. But that’s not enough. Unless the lender has a section of their site titled “Our Crooked Practices,” and they probably don’t, you will have to seek information elsewhere.

That’s where review sites come in. Just like when you’re looking for a restaurant, you can check reviews for both storefront lenders and online loans to read the experiences of other customers. Keep in mind that while one person could have a bad experience with a relatively trustworthy company or others could have a positive experience with a generally crooked company, so make sure there are ample reviews to make an informed decision.

Reading reviews should also give you a good sense of whether a company will consider refinancing your loan and how understanding they might be with that process.

Make sure your lender has actual people you can call for your customer service needs. This way, if you’re worried you might miss a payment or want to negotiate better rates, you can call their customer service line. If the good reviews you looked up are accurate, you could be able to speak with someone willing to accommodate your situation.

It’s even better if the installment lender reports your payments to the credit bureaus. Then, as long as you make your payments on time, you can build your credit as you pay it back, and then the next time you need a loan, you’ll be able to get better rates. It’s almost like refinancing your life!

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