Refinancing an auto loan while you have bad credit may not prove beneficial. However, if you had poor credit when you first initiated your loan, you can save thousands by refinancing at a lower interest rate. Before pursuing a refinance, consider your current credit situation and whether a refinance is financially beneficial.
Benefits of Refinancing
Refinancing your vehicle allows you to take advantage of interest rates that may not have been available when you originally initiated your loan. Whether your credit has improved or rates have dropped, a lower rate can offer lower payments and decrease the amount of money you pay back to your lender over time. Also, if you have money to put down toward your refinance, you can enjoy a cheaper monthly payment or shorter term, whereas putting extra money toward your current loan will not change your monthly payment requirement.
Considerations
If your credit rating has suffered since your original loan, refinancing your loan may not save you money. Obtain a copy of your credit report to determine if your credit has gotten better or worse. AnnualCreditReport.com allows you to obtain a free credit report from each credit bureau annually. Make sure your report does not show past due payments on revolving accounts, such as loans or credit cards. Many lenders require borrowers to bring account payments up-to-date before extending a loan.
Repossession
If your vehicle has been repossessed but your lender will allow you to get the car back if you pay the loan in full, a refinance is likely your only option. Even if your credit has suffered, a high interest-rate loan is a better option than a repossession, which damages your credit for years to come. Apply at local banks or online; search for a subprime lender if all other avenues fail. A subprime lender extends loans to high-risk borrowers, although rates and terms are uncompetitive. If you do obtain an approval, your interest rate may be higher than you expected. Make sure the payment is affordable before you agree to the loan.
Other Options
If you cannot obtain a loan with a better interest rate, fair term or with an affordable down payment, consider applying for a loan with a co-signer. A co-signer secures a loan, but must put his credit on the line. You might also consider selling your car. If your current rate is too high or the payment is no longer affordable, sell your vehicle for the loan's total payoff amount. If you planned on purchasing another car, you can also trade your current vehicle to a dealership.
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