Getting car finance with bad credit usually means one thing – higher interest rates.
As much as it hurts to admit, lenders will punish past “credit sins” by making you pay more to cover the higher risk. If you feel there’s a better deal out there, chances are there probably is.
Refinancing means swapping one loan for another. The first loan is “paid out” by a second, and you pay off the remainder of this new “refinanced” loan. The advantage is that you might pay less each month in repayments, compared to sticking with your long-term, high interest bad credit car loan.
If you want to get the absolute best deal possible on a refinancing loan, see if you can pay off as much debt as you can. If you’re able to consolidate or pay down outstanding debts, it’ll look better when you do find a new lender. Having better credit means you’ll get better deals and lenders who may have said “no” before begin to look at you in a different light.
You can also take the option of paying out the loan by trading in your current vehicle. This pays off the bad credit car loan in full. If your credit has improved, you can purchase a different car at a more favourable rate. You should also increase your income, if you’re able. This also helps when looking to refinance.
You should also look at how much a refinanced loan will save you, using an online calculator. Here’s an example:
Let’s say the amount owed on your car loan is $10,000. You’re paying 10% interest over a 60 month term with 36 months to go on this loan. Right now, your minimum monthly repayment is about $323. If you refinanced your loan with a 7% interest rate over a 36 month term, your monthly repayment would decrease by $14.23 and you’d pay $498.54 less in interest than your original loan.
If interest rates across the board have dropped since you took out your loan and you’re in a better financial position, refinancing is probably a good decision to make.
Remember to Research
With any major financial decision, it makes sense to do your homework. Shop around and see what lenders are out there and what options they offer. In some cases, you can apply online. Of course, before you commit, you should talk to a financial professional to figure out which refinancing option is best for you.
Bill is founder and managing director at Savvy Finance + Insurance. He has a been working in the vehicle & asset finance business for over 8 years. He also writes articles on car finance, chattel mortgage, insurance, consumer protection and insurance related topics.