The allure of a new car can override a buyer's financial sensibility, and it's not unusual for shoppers to drive off the lot with a car they can't really afford. Dealers offer one-stop shopping, where buyers can browse a lot of new cars, pick one out, and get financing through the dealership all in the same location. The deal can be signed within a few hours, long before the sheen of a new car wears off.
Buyers, especially those with bad credit, may realize later that they need to get out of a bad auto loan. These loans often originate at dealerships, which advertise deals for buyers with less-than-stellar credit, and come with double-digit interest rates that can be three or four times the rate a buyer with good credit would receive.
How can you tell if you have a bad auto loan? Here are several indicators:
- Your credit score is under 600 and the interest rate on your auto loan is more than 10 percent.
- The terms of your loan are for longer than five years. Oftentimes, lenders will lower your monthly payment by extending the length of the loan.
- You owe so much interest that the bad auto loan is for more than the value of the car, a situation that's also called "upside-down."
If you find yourself stuck with a bad car loan, here are five ways to get out of it.
1. Sell the Car
If you owe more on your loan than the car is worth, you may have to sell the car to get out of what will become an increasingly worse financial situation. You'll still be stuck with the balance of the bad auto loan, but you may be able to get a personal loan to cover the difference or refinance the remaining balance.
2. Refinance Your Loan
Ideally, you should keep your car at least until you can break even on the loan or, even better, until the car is worth more than the loan. A wide variety of lenders offer refinancing loans for cars, so shop around for a lower rate. Reducing the interest on a loan will immediately lower your monthly payments.
3. Renegotiate the Terms of Your Loan
If you cannot work out a refinancing deal with another lender, another option is to negotiate the terms of the loan with your current lender. You can ask for a lower interest rate, and if lender won't agree, you can ask for the terms of the loan to be shortened. Your monthly payments will go up, but shorter terms will help you get out of a bad auto loan faster.
4. Improve Your Credit
Bad credit may be standing in the way of a better loan. You can take steps to improve your credit, such as paying all of your bills on time and trying not to exceed more than 30 percent of your limit on your credit cards. Even small improvements to your credit rating could be enough to qualify you for a loan with a lower rate and better terms.
5. Find a Way to Pay It Off
Don't rule out the hard work of paying off the bad auto loan. This may require cutting all extra expenses or temporarily getting a second job, but making as many extra car payments as you can against the principal of a bad auto loan can quickly erase the debt.
Regardless of how try to get out of a bad auto loan, the experience could be invaluable for the next time you go car shopping. Before you buy a car, consider how the expense fits into your larger financial plans for savings and other large purchases, and make sure that you purchase a vehicle that matches with your priorities.