Is it a Good or Bad Idea to refinance a car loan with bad credit?
Depending on where you are financially, financing a vehicle can be a great option to consider to help build your credit, but it’s important to be well educated when making financial decisions. Refinancing a vehicle can be a decent way of lowering your monthly payment, but there could be negative consequences in doing so.
Here on the blog today, we want to talk about the concept of refinancing an existing auto loan with a credit union, how it works, and why it may (or may not) be a good idea.
Can You Refinance an Auto Loan with Bad Credit?
You certainly can often refinance an auto loan with bad credit, but you may find yourself in terms that aren’t as favorable. It all depends on your situation. If you are looking to refinance your auto loan, but have some question marks about your credit, here’s essentially what you’ll need to do to apply.
What You Need to Know
Why would you end up with higher rates if you decide to refinance with bad credit?
Well, for one, you have a lower score, which means you are “higher risk” for lenders. This could mean higher APRs, but this could be lower than your previous loan, especially if you improved your credit score from when the loan was originated.
It’s also important to remember that online lenders and community credit unions may offer lower rates or more flexible options than bigger banks.
You may benefit from extending the length of your loan through refinancing to lower your monthly payment, but you may end up paying more in interest, depending on your situation. It’s important to speak with someone directly about current rates, your existing loan, and your credit score. This is something you can do virtually over the phone with us or by stopping in to speak with someone at our branch in downtown Batavia.
Steps to Refinance an Auto Loan with Bad Credit
1. Get an Idea of Where You Stand
The first step is the simplest: find out where you stand. You may need to dig around a little or make a call or two if you don’t have your car’s loan paperwork handy. Firstly, get an idea of what your current credit score is. There are plenty of online tools that can give you your score. Next, determine your vehicle’s value. Understand what the car’s “Loan-to-Value” is.
This is where you calculate what your car is worth and divide your total remaining loan amount by the vehicle value. Then multiply that by 100. The lower your LTV, the better you look for a refinancing lender.
It’s also a good idea to look at your debt-to-income ratio. Divide your total debt by your income before taxes to determine your DTI.
2. Keep Making Payments
Until you complete a full refinancing loan process, you can help yourself look better to lenders by making your payment routinely and on-time. Avoiding any signs of weakness or inability to pay will be beneficial in the eyes of a lender.
3. Look Around for Rates and Options
You remember the part where the sales guy at the auto dealer got on the phone and made the call to the “financing company?” That’s your job now. If you want to get your payment down, you’ll need to shop around and find out who has the best rates. HINT: Credit unions often have more flexible options when it comes to refinancing.
4. Prequalify/Apply
In order to evaluate offers, you’ll need to provide some information. Whether you’re looking for online rates or shopping rates with a local community credit union, you can get an idea of APR, fees, and loan terms without fully committing to much. By using our tool online, you can submit information to help get us all the info we need to get you an idea of what your auto loan refinancing terms would be.
5. Evaluate Your Offers
Once you have all the offers in front of you, you can weigh your options to be sure you’re making the right financial decision for you. Until you do the work and take the steps to see where you stand, and see how much a refinance will REALLY be, you can’t truly make an informed decision. Be sure to consider all factors.
6. Gather Your Documents & Execute the Plan
Once you decide on the terms, loan, and lender that you feel fit your financial needs best, you’ll need to be organized and have all your proper documentation ready. You can consult with your lender on what you’ll need, but consider things like your ID, income proof, vehicle details, etc. Then it’s time to sign the documents, and your lender will help finish the process and begin your NEW auto loan.
If this is a new process for you, or you want some help calculating some of these figures, we can help. Just give us a call at (585) 343-5627 or stop into our branch in Batavia at 10 Jefferson Square!
