While it is always best to improve your credit rating before thinking about refinancing there are times when it might be to your advantage to consider this option. Before you start filling out stacks of paperwork and get ready to wait through the occasionally long loan approval process there are a few things you should about refinancing bad credit auto loans. This complete guide will ensure that you are fully informed before you sit down with a loan officer.
When is it a Good Time to Refinance a Bad Credit Auto Loan?
There are several situations where it might make sense financially to refinance a bad credit auto loan. Knowing when can increase your chances for approval, and this is always beneficial when you are dealing with a bad credit score.
- Improvement in credit history. Your poor credit history resulted in an extremely high interest rate when you purchased your vehicle. In the last 12 months if you have made every payment on time, you should start seeing an improvement in your credit score. Once the payments start showing up in your credit history, it might qualify you for a lower interest rate. This will lower the monthly payments, while saving you money over the duration of the loan.
- Interests have dropped. Interest rates can drop after you’ve signed a bad credit auto loan. Shifts in the economic climate, regulatory changes and increased marketplace competition are some of the reasons you might see a drop in interest rates. Refinancing can help you take advantage of the lower rates which can translate into lower payments and shorter loan duration.
- Your interest rate was increased by the dealership. Unfortunately some buy here pay here car lots are less than honest. Sometimes if the bad credit auto loan is through the dealership, you will be told that you only qualify for a high interest rate. It is easy to fall for this scam if you don’t know your credit score, and this is also why it is important to be well informed before you sign any loan agreement. If this has happened to you refinancing might be able to secure you a lower interest rate on your bad credit auto loan.
- Monthly payments are too high. This is the most common reason people with poor credit consider refinancing their high interest auto loan. Even though refinancing at this point typically doesn’t lower the interest rate, if approved it will lower your monthly payments. The downside is that it will increase the length of the loan. If you can’t make the monthly payments and handle your other financial obligations then refinancing will help you keep the vehicle, and rebuild your credit.
What are the Cons of Refinancing a Bad Credit Auto Loan?
Even though there are several good reasons you might want to refinance your high interest bad credit auto loan, you should also be aware of the cons. If you are reapplying for a new loan within 12 months of purchasing the vehicle it could lower your credit score for a couple of years. According to the major credit reporting agencies your score could drop by as much as 5 points if you refinance too early.
Other reasons why refinancing your bad credit auto loan might not be a financially smart decision include,
- A vehicle that was purchased new is now considered used, and the total cost of the refinanced loan may be more than the car’s resale value.
- Refinanced loans might come with smaller payments, but the length is usually extended. This means that you are actually paying more for the loan instead of saving money.
- If the vehicle is over 5 years old it might not be eligible for refinancing. Most lending institutions won’t consider refinancing a loan on a vehicle that typically comes with higher mileage and an increased risk for mechanical problems. If the mileage is less than 100,000 miles some banks and credit unions might consider approving the refinancing loan application.
- It is important to check your credit score before applying for refinancing. If your score has dropped you will probably end up paying higher interest rates, and this could even mean higher monthly payments. However if your credit score has improve it might be a good time to refinance your high interest auto loan.
- Some bad credit car loans come with penalties if they are payed off early. The penalty is put in place to ensure lending institutions still make some money off of the loan. Banks, credit unions and other lenders make the majority of their profits off of the interest they charge, and they lose money when it is paid off early. In some cases it can be more than the remaining balance due on the loan.
What About Credit Score?
While your credit score is extremely important when you are refinancing your high interest auto loan, if it is still less than perfect you can still be approved. The different types of lending institutions have varying requirements, and while you may have a low credit score you may still meet some of their other qualifications.
One requirement that all lenders have is that you must have a record of making the previous loan payments on time.
Along with your credit history and score some of the other items lenders look at when considering refinancing approval include,
- If you owe more on the current loan than the vehicle’s resale value.
- The age of the vehicle.
- If the vehicle’s mileage is over 100,000 miles.
Unfortunately if any of these apply to your vehicle and you have poor or bad credit you will find it difficult to refinance your auto loan.
How to Refinance a Bad Credit Car Loan
If you’ve decided that now is the best time for you to refinance a bad credit auto loan there are a few steps you need to take. The first one is to call your lender if the reason you’re seeking refinancing is due to an inability to make the monthly payments.
Before you sign any refinancing auto loan, even one from your current lender, it is always advisable to “shop around” to make sure you are getting the best interest rate and loan terms. Some options to consider include,
- Online lending institutions
- Brick and mortar banks
- Credit Unions
- Peer-to-Peer lending groups
Peer to Peer (P2P) lending groups often approve refinancing auto loan applications that traditional financial institutions deem too risky. Since these loans are through individual people it is important to do your research before signing any loan agreement. If they are not represented by a reputable group or marketing partner you could find that the majority of the monthly payment is going towards interest and not the loan.
Once you have decided on a lender you are going to need the following information,
Your Information
- You will need to bring proof of your social security number and present address. If you have been at your current residence for less than 2 years you will also need to bring proof of your former address.
- Past and present employment information, including address, phone number and owner/manager’s name.
- Proof of earnings. W-2s, pay stubs and filed tax returns will all be acceptable.
- The name of the current lending institution your bad credit car loan is with, along with the account number.
- The current balance of the loan and payment amount. You should also know the amount if it is immediately paid off since this can differ.
Vehicle Information
- Make, model and year of the vehicle
- Mileage
- Vehicle Identification Number (VIN)
You should also have a current copy of your credit report or at the very least know your score. Once you have all of this information together you are ready to sit down and start filling out the forms.
Cash Back Auto Loan Refinancing
This frees up some extra money that can be used for other things.
The reason that you might get to miss a monthly loan payment during refinancing is that it will take time for the paperwork to move through all of the necessary departments once it has been approved and signed. In some cases the first payment of the refinanced car loan might not be due for 60 days from the date of signing the agreement. This also is a common reason many people consider refinancing their bad credit auto loan.
Get Bad Credit Auto Loan Refinancing Even If…
If they meet the criteria that many lenders require they often find that their bad credit didn’t prevent them from being approved.
Some of the misconceptions people have that might be preventing them from seeing if refinancing their bad credit auto loan is the right choice for them include,
- Previous bankruptcy or one that is still open
- Record of a vehicle repossession
- Self- employed
- Currently receiving disability pay
- Have lower than average income
- Little or no credit history
Even though any of these will lower your chances of being approved for refinancing, and your choice of lenders might be limited, it might still be worth it to apply. The worst that could happen is that you will be turned down and stuck with the original loan agreement.
Refinancing Might Make Sense
If you need to lower your monthly payments or you think that you qualify for lower interest rates it might make financial sense to refinance a bad credit auto loan. Before you make any changes carefully consider your options, along with the pros and cons. If you still feel like it is the best decision for your situation then it is time to start getting your paperwork in order and shopping around for the best refinanced bad credit auto loan.