How To Refinance A Car With Bad Credit
Applying for an auto refinance loan once meant dressing up and heading to your local bank or credit union in hopes of impressing the loan officer enough to approve your application. Today, you can apply for a loan and possibly receive approval without getting out of bed.
The first step before applying is to familiarize yourself with your current credit standing. You can do this by pulling your free annual credit reports from each of the three credit bureaus.
Keep in mind that the free annual report shows you everything on your credit file, except for your actual score. You can check your credit score for free in several other ways.
While you can obtain refinancing from some lenders despite a bad credit score, your recent credit history generally must be clean for approval. That means your credit score must be better today compared with when you accepted your original loan.
Most lenders also want to see a history of on-time payments with your current loans. That means youre up to date with payments and have no recent late payments.
If you check all of those boxes, you can choose a lending network including those from the list above from which to complete a prequalifying form. This typically takes 10 minutes or less, and you may receive a near-instant decision.
How Do You Get Upside Down On A Car Loan
There are a few different ways you can find yourself with an upside-down car loan:
Your down payment was too small. Saving for a car takes a lot of time and not everyone has the patience or endurance to save up the cash they need to make a purchase this big. For most people, throwing a small wad of cash at the car and getting a loan for the rest is the easy choice. But is it the best choice? Definitely not.
Your loan has a high interest rateouch. Youre sitting in the front office chatting with the smooth-talking salesman. He says hes got a deal for you . . . Oh, youre not paying with cash? We can definitely help you out. Just sign here and these keys are yours! What he doesnt tell you is your interest rate could add up to a whopping 13%! Yikes.
Your car is just too expensive . You know you cant afford the car when you have to tell Fido his dog food no longer makes the cut every monthnot to mention the electric company. Its easy to get caught up in purchasing the car thats way outside your budget. Our wants start dressing up as needs and it can be hard to tell the difference between the two. Its hard to say no to the newer modelespecially when it has seat warmers!
Top Auto Loan Refinancing Lenders
Refinancing an auto loan could lower your rate and monthly payment, saving you hundreds of dollars a year.
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Refinancing your car loan is fast and easy and can put more money in your pocket. You may be able to reduce your monthly payment and boost your total savings on interest over the life of the loan.
You generally need a history of six to 12 months of on-time payments to make refinancing worthwhile and possible. The new rate youll qualify for depends on multiple factors, including your credit history and credit scores.
Refinancing your car loan is fast and easy and can put more money in your pocket. You may be able to reduce your monthly payment and boost your total savings on interest over the life of the loan.
You generally need a history of six to 12 months of on-time payments to make refinancing worthwhile and possible. The new rate youll qualify for depends on multiple factors, including your credit history and credit scores.
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Make As Many Payments As Possible
One more choice to escape from the negative equity position is to pay extra money each month toward the loan principal. This allows you to pay off the loan quicker and build equity at a faster rate. Before you do, check whether your loan agreement adds a fee if you pay it off early.
Another tactic would be to use savings money you might have been putting aside for a down payment on a future purchase to pay off your loan. The downside of that idea is that you no longer have money left for a down payment on your next car and not many banks want to make loans to consumers who have no down payment.
Tips To Avoid Going Upside Down On A Car Loan In The Future
When you take out a new car loan, these four steps can help you avoid going underwater on it:
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More Debt Is Not A Good Fix For Negative Equity
If youre really scrambling, you might be tempted to take out a personal loan or open a credit card with a temporary zero-interest promotion and use it to pay off some of your auto loan. While this technically reduces your negative equity, it doesnt fix your debt situation. Taking this route is more likely to hurt you later on, so focus on the other alternative weve outlined instead.
Ready to refinance your car loan? Find a Better Loan Now
Options When Youre Stuck With An Upside
The decision to act on a negative equity position is really predicated on the urgency of the need. The strategy is different if you have time, says RateGenius Chief Lending Officer Roger Douville.
Youre probably not going to convince someone to buy your car from you for more than its worth. But there are steps you can take in order to get yourself in a better financial situation than youre currently in. Here are five options to consider.
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Upside Down Car Loans
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In a Nutshell
A car loan is “upside down” or “underwater” when the borrower of the loan owes more than the vehicle is worth. This negative equity situation can cause financial problems if a car is stolen or needs repairs that insurance wonât cover. Borrowers have options to flip their loans “right side up” or get them out of their upside-down loan obligations.
Written byChiara King.
There are many things that can cause a car owner to owe more on a car than itâs worth. Common reasons include: bad sale terms at the time of purchase, loans that donât pay down the principal fast enough, and sudden repair expenses that the owner must pay out of pocket. A negative equity situation can cause big financial problems if your car is stolen, gets totaled, or needs repairs that your insurance and warranty wonât cover. Thankfully, if you are upside down on a car loan, there are strategies you can use to turn right side up or to get out of the loan completely.
Pay Ahead Of Schedule
Another way to build equity and reach the surface rather than being trapped underwater is by paying your loan ahead of schedule with extra payments. This doesnt mean every paycheck you earn should go towards your auto loan. All it means is putting any extra cash you have, whether 25 dollars or 300 dollars, towards your auto loan. This tactic will help you get right side up, slowly but surely. However, you should make sure you read the fine print of your loan agreement. Some lenders may add a fee if you decide to pay your loan off early.
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Love Your Car But Not Your Loan
If you bought a car recently, there was likely a lot to think about. Its possible you gave more attention to the details of the vehicle youd be driving rather than the loan you now have. If youre feeling iffy about your car loan and wondering if theres potential to lower your monthly loan payment, you might want to consider refinancing.
How an Auto Loan Refinance Works
Refinancing an auto loan means you take out a new loan to pay off the balance of the existing loan. For example, if you financed a car at a dealership at a higher interest rate than what your financial institution is offering, refinancing your car loan with a new loan at your financial institution could get you a lower interest rate and lower payments.
When Refinancing Makes Sense
Refinancing your car loan can save you money, but the circumstances need to be right. Here are a few scenarios in which refinancing might be worth considering:
Interest rates have dropped. If interest rates have gone down, its a great reason to refinance. If you can refinance at a lower rate, your monthly payment could decrease. By reducing your monthly payment obligation, you can choose to pay extra and apply more money to the principal. This can allow you to pay off your loan faster and still save on interest.
When Refinancing Might Not Make Sense
Your car is older or has high mileage. If your car is older than 7 years or has more than 90,000 to 125,000 miles, some lenders may not refinance your loan.
Know Your Goals
Does Refinancing Hurt Your Credit
When you refinance your auto loan, the new lender sends money to the previous lender to pay off the debt. The previous lender must report to the credit reporting bureaus that youve satisfied that loan, but it can take up to 60 days for it to appear on your credit report.
During that time, your credit file may show that you have two outstanding auto loans. That added debt could temporarily cause a drop in your credit score. Once the old loan reflects the payoff, your score will improve.
Applying for a refinance loan can also add a hard inquiry to your credit report. Every time you apply for any type of loan or credit, the lender places an inquiry on your credit file to see its contents.
Inquiries remain on your credit report for two years, but their impact on your score lessens over time. Lenders dont mind seeing a few inquiries at a time, but once the total reaches four or more in a two-year period, it can start to lower your credit score.
Excessive credit applications make you look desperate to most lenders and will give them pause when considering your application. If you already have an excessive number of inquiries on your credit file, a refinance application can cause your score to drop by adding an extra inquiry to your credit report.
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Can I Refinance A Car If I Don’t Have Great Credit
Although it may be harder to get approved, refinancing a car loan with less than ideal credit isn’t impossible. Sometimes, it’s as easy as finding a creditworthy co-signer. Or, you may need to wait a bit while you build a higher credit score or show you have a better payment history to prove your eligibility. Asking your lender about your refinancing options will help ensure that you can get a competitive rate.
An Upside Down Car Loan Often Results From Low Down Payments Long Payment Terms And Other Factors Learn How To Manage It
An upside down car loan is much more common than most people realize. The nature of car purchasing, depreciation and sales tactics at dealerships often lead to people who are upside down in a car loan, meaning they own more money on the loan that the vehicle is worth.
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Negotiate In Your Lender
The first thing ought to be to speak with their lender. Most probably about your finances they already know that for people with an upside-down car finance, youre prone to default on the funding altogether, specifically if you in addition have bad credit.
If youre unsealed relating to your circumstances, your loan company could possibly be ready to renegotiate the terms of the borrowed funds in order to stay away from you defaulting.
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Take Out Another Loan
Yes, you read that right, you can refinance a car loan that is upside down. Taking out another loan may help you get out of an upside down car loan. Refinancing your car loan is an option that allows you to take out a new loan to pay for your current one. The reason people may opt for this is because the new loan may have a lower interest rate, which means more of your monthly auto loan payments will go towards the principal value of the car, rather than towards interest collected by the lender.
Can You Refinance Your Car Too Soonor Too Late
Many people think its necessary to wait a set number of weeks or months to consider refinancing. Others wait too long to refinance their cars for it to make financial sense. Heres what to know about refinancing timing.
Knowing how to refinance your car the right way is the key to getting into a better loan. Do your research, be prepared and use these tips to get the new deal you need.
Sometimes the best option for car loan refinancing may not be a car loan at all. A home equity loan can be used to finance a car as well. Because this is a secured loan using the collateral in your home, the interest rate may likely be lower than a personal loan or even dealer financing, but the term may be much longer than a car loan refinance or a personal loan, so you may pay more interest. Make sure to check all the details of the loan terms.
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Calculate The Negative Equity
The first step to knocking out the negative equity is to find out how much there is. To do this, youll need to look up how much your car is worth and how much you owe on it. A quick way to find your cars value is to use a site like Kelley Blue Book or Edmunds. Both will offer several types of values for your car choose either the trade-in value or the private-sale value. Then find out how much you currently owe on your car and subtract.
For example, if your car is worth $8,000 but you owe $10,000 on your auto loan, youre upside down by $2,000.
To find out how much you owe on your vehicle, log in to your online account with the lender or call them and ask for the payoff, which is the amount of money it would take to pay off the current loan completely.
Disadvantages Of Auto Refinancing
Online lending networks provide access to many lenders with a single application. That alone will improve your chances of approval despite having bad credit. But it also means that every potential loan offer you receive will have varying terms and conditions.
Some lenders tack on origination fees that make the loan more expensive than it seems on the surface. Those fees can get tricky, so make sure you know exactly what youll have to pay back before you accept a loan.
Depending on the terms of the loan, you could also end up paying more in finance charges. Extending your loans repayment window can lower your monthly payment but may also increase your overall cost of the loan.
For example, a $15,000 loan at 3.5% interest over 36 months will cost $15,823 to pay off at $440 per month. If you extend that loan to 60 months, youll save $167 every month, but also pay $16,373 to pay off your loan.
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