A bad car loan adds a lot of stress to your life. Whether you’re struggling to make your car payments every month or you discovered that you got taken for a ride on your interest rate, realizing you’re in a bad financial situation makes you want to spring into action to correct it. Luckily, there are ways to escape a bad car loan or unreasonably high interest rates. From refinancing your car loan to selling the vehicle or communicating with your lender about skipping a payment, being proactive about the situation will always serve you better than doing nothing.
Refinance Your Car Loan
The most common option to fix a bad car loan is to refinance your vehicle. When you bought your car, you were offered a car loan with a principal, interest rate and specific loan terms for the repayment. Applying for refinancing gives you a chance to adjust your interest rate or the loan terms to be more favorable for your financial situation.
Refinance For Better Interest Rates
There are several reasons to refinance your vehicle when you're stuck in a bad car loan. Average auto loan interest rates can fluctuate and if you bought your car several years ago, it's a good idea to check the current averages. If you have good credit, the averages will give you a benchmark of what your rates will be if you were to refinance. This can also help you if you didn't shop around for the lowest interest rates when you got your car since it will allow you to do so now.
Another good time to refinance is when you've improved your credit score. A majority of car shoppers get stuck with a bad car loan due to their poor credit scores. Lenders can hike up the interest rates for this group because they pose a higher risk. If your credit score has gone up since the car loan was issued, there is a good probability that your interest rate will go down after you refinance.
Example of Auto Loan Refinance Savings
|$10,000 loan for 48 months with an APR of 18%
|Payment = $294
|$10,000 loan for 48 months with an APR of 10%
|Payment = $254
|$17,000 loan for 60 months with an APR of 18%
|Payment = $432
|$17,000 loan for 60 months with an APR of 10%
|Payment = $362
|$24,000 loan for 72 months with an APR of 21%
|Payment = $589
|$24,000 loan for 72 months with an APR of 11%
|Payment = $457
Refinance For Better Loan Terms
If you've experienced a financial setback and need to stretch out your car loan, or if you want to shorten your loan terms to save on interest, refinancing allows you to adjust the repayment schedule. Many car buyers are tempted by the low monthly payments of long term loans and some end up paying for seven years or more. The extra costs in interests can add up to thousands of dollars. By refinancing for a shorter loan term and lower interest, the overall car loan costs become a lot more digestible.
How Soon Can You Refinance?
There is no minimum amount of time you must wait to refinance. If you realized that you're in a bad car loan because you hastily agreed to unfavorable loan terms or interest rates, you can apply for refinancing after making just a few car payments. By refinancing as soon as it makes sense for you, you'll get the opportunity to have lenders compete to offer the best rates, and you'll be on your way to more manageable monthly payments.
Sell the Car
If you depend on your vehicle to get to work or take care of loved ones, the thought of selling it to get out of a bad car loan can seem unrealistic. However, it can be a responsible way to avoid repossession or a destroyed credit history when you fail to make your payments. Selling the vehicle doesn't automatically mean you need to go without a car at all. As long as you're not upside down on your car loan, you should be able to trade it in for a more affordable car.
Sell to Carmax
Selling to Carmax is a hassle-free way to get out of car loan you can't afford. You'll be able to take your car into one of their nationwide stores, get an appraisal and then sell the vehicle. Carmax will pay off your loan and issue a check for the difference. This allows you to get a vehicle and loan that are better suited to your situation.
Sell to a Private Party
An alternate (though more challenging) route is to sell the vehicle to a private party who will take on the auto loan for you. Most lenders can arrange for a transfer of your loan to the buyer. The buyer can also refinance the loan into their own name, leaving you free and clear of payments. You can take this route if you believe you can get a better offer from a private seller than from Carmax.
Trade In at the Dealership
A third option for selling a financed car to get out of a bad car loan is to trade in the vehicle at the dealership. You'll need to speak with the dealership's finance office to arrange this. If, for example, you still owe $10,000 on the vehicle and the dealer values your car at $15,000, they will pay off the remainder of your loan and you can put the difference of $5,000 towards a down payment for a different vehicle that better suits you. If you owe more on the car than it's worth, the dealer can still buy it but they will roll up the remainder that you owe into a new loan for the trade-in. Be very careful with this option as it can land you in a deeper hole than before.
Communicate with Your Lender
The last option doesn't exactly get you out of your car loan, but it can buy you some time to save up and get a better handle on your payments. If neither option outlined above works for you and you can't afford your monthly car payments, the last resort will be to skip a payment. If you do this one too many times, you risk taking a major hit to your credit report. Even more worrisome is the risk of getting the car repossessed which can happen after just one missed payment.
To avoid these serious repercussions, it's important to communicate and be upfront with your lender. Before you miss a payment, give them a call and explain your situation. They may be willing to set up a more accommodative payment plan so that you don't default. No matter which route you choose, taking action to correct a bad car loan as soon as possible can save you from bad credit, unnecessary expenses and plenty of headaches.