Many people with poor credit take out car loans with exceptionally high interest rates. Although many of these borrowers are happy because they are able to finally purchase a car, a high interest rate on a vehicle purchase unforutnately has numerous negative consequences.
Some of these consequences include:
- Owing more on the car than it is worth over time.
- Having to pay money if your car is totalled in a wreck because you owe more than the insurance company is willing to give you.
- Having higher monthly payments that can be difficult to afford.
In fact, according to a year long study by LendingTree of new 2014 car purchases, someone who has a poor credit score could have as high as 19% APR on their car purchases, whereas someone with excellent credit could expect as much as a 4% APR if they took out a loan for a long period of time.
These numbers are alarming because a car is a depreciating asset. So, as soon as you drive it off the lot, it loses value and continues to lose value over time. If you have a high interest rate, you will make monthly payments with a large portion of those payments going to interest. This means that even if you pay your car note on time every month, you're still at risk of being underwater on your car loan because you are reducing the principle on your loan at a much slower rate.
The Solution: Refinance a Car
If you have a high interest rate on a car loan and you want lower monthly payments or to secure a better loan all around, the solution may be to refinance your car. This means that you will get a new loan with a different lender, who will pay off your existing loan and create a new loan with new terms and hopefully a much lower interest rate.
The best candidates for an auto loan refinance are people who have repaired their credit since getting their initial car loan. So, if you had a low credit score with several adverse accounts on your credit report when you purchased your car, you want to make sure you've taken all the necessary steps to rectify past mistakes. This might include calling lenders to settle debts, writing to the credit bureaus to ensure all the information on your credit report is correct, and staying current on all your monthly payments so that your credit score increases.
If you do this over the course of a few months and see a notable difference in your credit score, then you will likely qualify to refinance your car.
Final Tips for Refinancing a Car
Although refinancing a car may be the best option for you, there are still some important tips you should follow before taking the leap:
- Do your research, and don't go with the first loan offer you're given. You can always negotiate and compare lenders to get the best possible APR for you.
- Make sure you understand all your paperwork and have records of everything. Don't just sign the forms hoping to get out of your bad loan quickly. Ask lots of questions of your new lender to make sure you understand everything.
- Stay on the right path. Even though past financial mistakes led to a high interest rate on your vehicle purchase, repairing your credit will allow you to refinance and pave the way for a better financial future.
Ulitmately, refinancing a car could be a good option for you if you want to lower your monthly payment and you've taken steps in the past few months to improve your financial life and get on the right track. This will also help you to see the value in keeping a high credit score so that you can take on even more responsiblity and bigger loans in the future, like a mortgage on your dream home.