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How to Renegotiate a Loan When Your Credit Improves

Christine Spencer

Auto Loan Expert

Has your credit score increased significantly since you obtained a loan? It may be possible to renegotiate your loan so you can pay a lower annual percentage rate (APR) over the remainder of the term. There’s no guarantee you can do so, but it’s worth a shot to save money, and you’ll significantly improve your odds at renegotiating by following the right steps.

Check for a Prepayment Penalty

Some lenders include prepayment penalties in loan contracts. If your loan contract has a prepayment penalty, then you have far less leverage in negotiating with your lender, because they have essentially locked you in to the loan.

Consider the Lender’s Position

Prepayment penalty or not, there’s no harm in asking your lender to renegotiate your loan. While you may not have much leverage, the lender wants to keep your business, which may make them willing to renegotiate. This is especially true if this loan isn’t your only business with the lender. Let’s say you obtained the loan through a bank that you’ve used for years. As you are a long-time customer, the bank is more likely to renegotiate with you to keep you happy.

Look for Other Options

If your lender is playing hardball but you don’t have a prepayment penalty for your loan, the next step is to see what other options are available. Contact other lenders and explain your situation, then see what kind of terms they could offer you on a loan. Since your credit is better, you may be able to get a loan equal to the amount you owe but at a lower interest rate. A new lender could even pay your outstanding loan for you and then transfer your loan amount to themselves.

Contact Your Original Lender

Once you have gotten loan offers, it’s time to return to your original lender to see if they’re willing to renegotiate. At this point, the lender is in a more difficult position. If you get another loan to immediately pay off the one you have, then the lender will lose the interest that you would have paid over the remainder of your loan’s term.

Your lender has two options here: let you walk or renegotiate. It’s possible that the lender is wary about offering you a better deal even with your improved credit score, because your credit wasn’t that good when you first applied. If your lender refuses to renegotiate, you can follow through with the best offer you received from another lender.

Or, the lender could decide to renegotiate because they see that you’ve improved your financial habits to boost your credit score and that you’ve been making your loan payments on time. Since you present less risk as a borrower now and you’ve been a good customer, they may want to work out a deal to retain your business.

The Renegotiation Process

The ideal situation for you is that your lender matches the best offer you received. You’ll get the best deal without needing to go through the inconvenience of applying for another loan, as it’s much easier to do an auto loan refinance on a loan you already have.

There’s also the possibility that your lender presents you with better loan terms that still don’t match your outside offer. At this point, it’s a judgement call on your part. Refinancing through your original lender will be the most convenient way to go, and there’s less risk involved. During periods when car loan rates are fluctuating quite a bit, that offer you received from another lender may no longer be valid when you go back. That lender could end up offering you a loan at a higher APR or deny you for a loan entirely. When you go back to your original lender, their offer could also be off the table.

The smart move is to have a number in mind before you go back to your original lender. Do the math to figure out how much money you would save on your loan at various APRs. If the lender meets your number, go with them, and if not, don’t take the deal. By figuring out what you’re willing to accept before you attempt to renegotiate, you don’t need to make a decision on the spot.