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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 July 27, 2023
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Having bad credit, unfortunately, means having far fewer financial options than a person with rosier credit. And that lack of options is even more restrictive when you're seeking out a loan.

People with great credit have access to all manner of personal loans. Big loans, little loans, loans with shiny gems embedded throughout. People with not-so-great credit, on the other hand, will have access to, well, fewer loans than that.

In all likelihood, they'll be stuck with a bad credit loan with an Annual Percentage Rate (APR) that's much, much higher than the annual rate for a standard loan.

Still, 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 into a dangerous cycle of debt. (For all the details on bad credit loans, check out the OppU Guide to Bad Credit Loans here.)

If you've taken out a bad credit loan, you'll probably be given the option to refinance your loan at some point before the loan 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 predatory, 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've paid almost $1,500 in interest, and you've got a remaining balance to be paid of $1,853.

You get an offer to refinance your loan, and you decide to take it. Your refinanced loan also has two-year payment term, and the interest rate is only 15%. Your new monthly payment is only $90.00. So you'll be paying much less every month, and your balance will be earning less interest, but you will be paying off the loan for one year longer than you otherwise would have.

Often when people talk about refinancing loans, they aren’t talking about short-term loans like payday loans or title loans, but longer-term loans, like student loans and mortgages. Still, 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: Nope.

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

However, if you can't pay back your loan on time, that doesn't mean your out options. It just means that the option you do have is pretty awful.

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 "rollover" your loan. When you rollover a loan, you basically pay only the interest that is owed and, in return, you get some additional time to play the loan off—plus a whole new round of interest.

Let's say you have a two-week, $300 payday loan that costs $45. To roll it over, you would pay the $45 in interest and receive another two weeks to pay the loan off plus another $45. Whereas before you only owed $345 back to the lender, now you owe 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. But the more you roll it over, the more worrying that APR becomes—not to mention more expensive. And if you're having trouble paying your payday loan now? it seems like you’ll still have a tough time paying it two weeks from now, with the rollover fee on top.

Installment Loans for bad credit can usually be refinanced.

Longer term, bad credit installment loans will not only offer you the option of refinancing—it can actually be a really 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 risk of paying more money in interest overall.

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’re going to have to get some of your 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 see what kind of experiences other customers have had. Obviously, it’s possible that one person could have a bad experience with a relatively trustworthy company or a few people could have had a good experience with a generally crooked company, so you’ll want to make sure there are a lot of reviews so you can get a good sample size.

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

You’ll definitely want your lender to have actual people you can call for your customer service needs. Then, if you’re worried you might miss a payment or you just want to try and get better rates, you can call their customer service line and, if the good reviews you looked up are true, you’ll hopefully be met with someone willing to accommodate your situation to the best of their abilities.

It’s even better if the installment lender reports your payments to the credit bureau. Then, as long as you make your payments on time, you’ll 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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