Auto loan refinancing is definitely an option for people who were approved for bad credit car loans. Since most lenders reserve their finest deals for customers with good to
excellent credit standing, the options given to you when you first purchased your car were limited to banks that will approve bad credit.
However, as time has passed, and you have been working on improving your credit score. It may be time for you see about refinancing your current car loan. We recommend that you start looking around for options after 8 months of timely payments and have a lender of choice in mind when you reach 12 months.
How is an auto loan refinance done?
Refinancing basically means you are approaching either your current lender or approaching a new lender, to take a look at your loan, your current interest rate, and your timely payments, and asking them to give you a lower rate.
Just as you conducted research and comparison when you first applied for a car loan, the same steps should be done in refinancing a bad credit car loan.
- Check if your current lender offers a refinancing program but don’t forget to investigate other refinancing options from other lending companies.
- Search online for auto loan refinancing or car loan refinancing
- Ask friends and family for a recommendation
- Use a service like Yelp to find and read reviews about a potential company
- Look and see if they have a good rating with the BBB
- A much-overlooked source of financing, but a place that gives great rates is your credit union! If you belong to one, make sure you call them and give them the opportunity to earn your business!
Approaching a bank – Shake off that bad credit mindset
A lot of consumers recovering from having a bad credit score approach a bank with some trepidation. They go in with the mindset that if they are “WILLING” to work with me, I’ll take whatever they offer me. If you have been working on your credit and you see an increase in your score. Leave that mentality behind you. Banks are looking for people with good credit to give loans to! You are doing THEM a favor, not the other way around!
Should you refinance your auto loan?
If you know you are in a high interest loan and you have called around to see what current rates are. Refinancing makes sense. A high interest rate means most of your money is going to pay the interest on the loan. NOT pay down the loan principal. If you can refinance and get a lower payment. And then KEEP paying your old payment amount, you will pay off your car faster! A car loan can be refinanced as long as:
- You meet the lender’s requirements.
- Typically, a lender demands a minimum refinancing loan amount.
- The value of your car should also be worth more than the amount of your loan.
Looking at your credit as a whole
Some people mistakenly focus on just 1 aspect of their credit. And that’s to pay the bad credit loan on time. But they, unfortunately, don’t do much with the rest of their report. When you go to refinance your auto loan, the banks will look at your credit as a “whole” they will not just say “Yes, we want to lend you money”. If you have only been paying the car loan. They will wonder why everything else is not being paid. And most good credit lenders will still shy away from doing business with you.
BUT there is still hope. Your current lender may be willing to lower your payment. But they are not obligated to. They can see from the rest of your credit report, no one else will pick up the loan. So it’s not like they will lose your business if they decline to lower your rate.
Does this mean everyone should refinance their car loan?
Refinancing a loan can enable you to save money by obtaining a cheaper interest rate, but if your repayment period extends longer, then you will end paying more in the long run. Furthermore, if your balance is below $7,500, most lenders will refuse to refinance your current loan.
Before making a decision, you should weigh the pros and cons. For instance, if there is only a short time left before your loan term ends, it might be better to just ask them for an early payoff amount rather than trying to refinance it.