How Do I Know If I Have A Bad Car Loan
Car loans are not moms apple pie, they can go bad before theyre gone. Almost any car loan can be a bad car loan if its disagreeable to the person who has to pay for it. There are three things that are most often referred to when marking a bad car loan as such.
1. The cars purchase price was too high.
This is rarely the fault of the car loan itself, but of the vehicle and changing market values. Todays good deal could be tomorrows ripoff. Sometimes its the vehicle itself, which may be more of a liability than expected. Sometimes its the overall cost, after add-ons and expenses. Some of those add-ons, such as GAP insurance or maintenance contracts, can be partially refunded to result in a better total price on the loan.
2. The car loans APR is too high.
The annual percentage rate of the car loan may be high due to circumstances that existed when the loan was taken out. The higher the risk of payments being missed, the higher the APR will be. Poor credit, low credit, or other circumstances at the time the loan was made may have dictated a higher percentage rate for the loan. Those circumstances can change and if your financial situation is better now than when you took out your car loan, that APR may be a detriment that needs to be fixed.
3. Add-ons and extras were too expensive.
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Lender Considerations When Trying To Get An Auto Loan
When you get an auto loan, theres two significant factors. One is your income, and therefore allows lenders recognize how far you can afford to blow month-to-month, plus the second will be your credit history, and this means the alternative that youll satisfy the loan obligations.
That have a great 600 credit history alerts loan providers that you struggle to pay currency that you borrow so they really be cautious whenever loaning your currency.
A good way this can feeling your car finance was the pace you will qualify for. Interest rates vary away from step 3.5% for those with advanced level borrowing to over fifteen% of these with lower credit ratings.
Make As Many Payments As Possible
Another way to get out from under an upside-down car loan, if you can afford to, is to pay extra toward the principal each month. This will pay down the balance and increase equity faster. Before you do, check whether your loan agreement adds a fee if you pay it off early.
You can also use savings to pay off your loan. The downside is that you no longer have money for a down payment on your next car, and not many banks want to make loans to consumers who dont have a down payment.
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Consider A Loan Assumption
Not all lenders will allow this, but some will allow you to find a buyer who can take over your existing loan. This means that they will start making payments, and the loan will be transferred into the buyers name. The lender will need to approve this, and the new buyer will need good credit, but it can be a great way to get out from under an upside-down car loan.
Pay Off The Car Loan Early
If you have the cash available, simply paying off your car loan early could be the fastest way to get out of it. Additionally, this will save you money on interest and might also help improve your credit score by reducing your outstanding debts.
Keep in mind that some lenders charge prepayment penalties if you repay your loan ahead of schedule. Be sure to check your loan agreement or contact your lender to see if youll end up with one of these fees.
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Move Your Debt To A Balance Transfer Credit Card
If youre struggling with monthly repayments or paying off a loan with an APR higher than 36%, you might save by moving it to a balance transfer credit card. This option might not be the best if you have bad credit or low income, though. You could have difficulty qualifying for a credit card with a high enough limit or favorable rates.
Even if the credit card comes with a higher rate than your current car loan, you may be able to take advantage of a 0% APR promotional period sometimes as long as 18 months. Youll be responsible for minimum monthly repayments, giving you the flexibility to make your repayments fit your budget.
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Quick tip: Dont just pay the minimum
If you choose this method, commit to making fixed repayments each month that you can afford to. Only making the minimum monthly repayment can quickly land you with an unmanageable pile of debt when interest kicks in.
Our Recommendations For Refinance Auto Loans
Refinancing is one of the safest options for getting a better payment and making your car loan more manageable. Refinance comparison websites like Auto Approve and myAutoloan make it easy to prequalify and compare offers from lenders.
- Customers save an average total of $2,225
- 90-second secure application process
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Using A Car With Negative Equity As Trade
If youre considering trading in a car with negative equity, dont end up with even more negative equity with our new loan.
Rolling the negative equity into the loan by trading in a car with negative equity means you will owe more than the new car is worth before you even sit in the drivers seat.
For instance, if you still owe $7,000 on a car thats worth $5,000, the dealer will credit you $5,000 for the trade-in and add the remaining $2,000 to the new loan. That means youll start off owing $22,000 on a $20,000.
Find a way to eliminate the negative equity before the trade-in. Pay it off with a personal loan, money from a home equity loan, or some other source that has a lower interest rate than the car loan . If you cant pay the full sum, pay as much as you can to lower it.
If you cant afford to eliminate the negative equity, consider keeping the car rather than getting another one. Find ways to cut monthly expenses so you can afford the payments and, if possible, pay more toward the principal, increasing your equity until you can make a better deal on a new car.
Caldwell, of Edmunds, said. Unless there has been a substantial change in your life circumstances youve started a new construction business and now you need a truck or you just had triplets and now you really need a mini-van to have a new car loan and negative equity in your trade-in does not put you in a good place financially.
Factor #: How Cooperative Is The Other Person
Unfortunately, you need some cooperation, says Leslie Tayne, Esq., and founder of Tayne Law Group. Ive had many people come in here saying, What do I do now? I say, You cant do anything. Without their cooperation, its just not going to happen.
This is especially true in the case of co-borrowers. Since the other person is also a joint owner of the car itself, youll generally need their permission before making any major changes like refinancing it out of their name, retitling it in your name, selling the car, etc. It can create a huge hassle, especially if you and the other person arent on speaking terms anymore.
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Trade In Your Car For A Less Expensive One
When refinancing is off the table, you can often downgrade to a less-expensive, used car by bringing it in to a dealership. You wont fully get rid of your car loan, but you could reduce your balance.
Read the contract carefully before you sign it, though. Some dealerships will try to move your current balance into a loan with a longer term. This gives you lower monthly repayments, but you could actually end up paying more in the long run if your rate stays the same.
What To Do If You Cant Afford Your Car Payments
Its important to make sure you can afford a car before you finance one. But if your circumstances have changed and you arent able to make your loan payments, contact your lender as soon as possible. Depending on your repayment history as well as your credit score, the lender could be willing to lower your interest rate, reduce your monthly payments or otherwise alter your loan terms.
Some lenders also provide assistance options to borrowers dealing with financial hardship like a job loss. For example, you might be able to temporarily defer your payments or make interest-only payments.
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How Getting Out Of Your Loan Affects Your Credit Score
The way in which you choose to get out of your car loan can have a big impact on your credit score. If you keep your loan current and sell your vehicle to pay it off, then you should not see a negative impact. You might even see your score rise a point or two since your total debts will be lowered.
However, if you default on your loan or go through a voluntary repossession, your score will take a hit. Missed payments and defaults are reported to credit bureaus like Experian, Transunion, and Equifax. Defaulting on a loan obligation has an extremely negative impact on your credit score, and you might be unable to get a new loan for quite some time. Make sure that you consider these impacts when deciding how to approach getting out of your existing loan.
What If Youre Upside Down On A Car Loan
Youre upside down on a car loan if you owe more than the car is worth. This can happen if:
- You took out a bad credit auto loan
- Your loan extends beyond 60 months
- You bought the car brand new in the last couple of years
- You refinanced your car to a longer term without a better interest rate
It can be hard to get out of your car loan if its upside down. Our recommendation is to keep making payments or even make extra payments until your balance dips below the value of the car.
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Good Option: Pay Off The Car Loan To Free Up Monthly Cash
Your best option to get out of a car loan is to pay off the remaining balance.
If youâre struggling with payments, however, this is easier said than done. But if you can come up with the cash to pay off the loan, you wonât have to make any future payments.
Paying off the loan may also benefit your credit, as it shows lenders that you are a responsible borrower.
When you pay off a car loan, the lender should send you a letter confirming that the debt has been fully paid. You should also get the title to your vehicle, as you own the car outright once your loan is paid off.
What To Do If You Can’t Afford Your Car Loan Payments
During the financing process, it’s important to consider your budget to make sure you can afford the vehicle you’re buying. But financial situations can change and you may now be finding it difficult to stay on track.
If you’re having a hard time making your monthly payments, here are some potential ways out.
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A Bad Car Loan Is Not The End Of The World
According to recently gathered statistics, 35% of Americans had car loans in 2019. This number is not expected to change as the need for personal transportation continues to grow.
If youre one of the millions of Americans who have taken out a car loan, its essential to find out if you have a bad car loan and understand your options for getting out of it. Refinancing your car loan is often the best way to save money and get yourself into a better financial situation.
Ways To Legally Break Free Of Monthly Debt Against Your Car
Car title loans are like comfortable beds: Theyre easy to get into, but you eventually need to get out. Theyre typically expensive, and they tend to stick around a lot longer than you initially expected. As a result, you may continue to pay and roll the loan over, month after month. Title loans are also riskyyou can potentially lose your car, making it hard to get to work and travel safely .
Here are six options for legally getting out of an auto title loan, plus a few tips to protect your finances.
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Fair Option: Sell The Car And Pay Off The Loan With Proceeds
If you donât see any way to keep up with your car payments, it could be a good time to sell the vehicle and buy something that is a better fit for your budget. When you sell the car, you can use the proceeds to pay off the remaining loan balance.
If youâve never sold a car, the best way to sell for the highest value is a private sale to another individual.
Selling a car to a dealership or car lot is easier but may lead to a lower sale price. When selling to an individual, make sure to get paid with a cashier check or similar to ensure you donât lose out due to fraud.
Some auto loans may be âunderwater,â which means you owe more on the loan than the car is worth . This is most common when buying expensive new cars, as the value goes down quickly.
If you sell a car with a loan thatâs underwater, youâre still going to have to pay the difference to pay off the loan.
Learn more about what it means to have an upside down car loan HERE.
Understanding The True Cost
Understanding the costs of a car purchase before you begin shopping is a very important factor. On top of the window sticker price, youll also be responsible for sales taxes, registration fees, and probably some dealer fees. The latter is usually on the sticker, but not always. You may also find that in order to get the vehicle you want, youll need to have dealer add-ons for accessories or upgrades. Which adds to the window sticker cost. Be prepared to find a perfect vehicle match and have to say No and walk away from it to find something else. Those costs can mean too much is being paid compared to your budget.
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Mediocre Option: Voluntary Repossession
If you canât keep up with the cost of the car loan and can live without it, you have the option to give the vehicle back to the lender with a voluntary repossession.
Unlike having the repo man show up and take the car, this is a proactive approach to getting out of an underwater vehicle loan.
However, just because itâs voluntary doesnât mean itâs good for your credit. A voluntary repossession is considered a type of default. This is a negative event that will stay on your credit report and influence your credit score for up to seven years.
But it could make sense is some cases as it stops your loan payments right away. Voluntary repossessions are generally noted as such on your credit, which looks better to lenders than a regular loan default.
Can You Return A Car You Financed
The short answer is no. Although many people wonder how to return a car you cant afford, it is not quite that easy. Once you have financed a car, then you are a party to a binding contract. You are required to make the payments as outlined in the loan agreement. If you are unable to make the payments, then you might consider a voluntary repossession. This is similar to returning the car, and the lender might be willing to work with you on alternate repayment options.
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Negotiate With Your Lender
Depending on your situation, getting out of your car loan may be overkill. Call and speak with your lender about your situation and see if you can make a deal.
For example, if your financial challenges are temporary, you may be able to negotiate a forbearance, which pauses your payments for a short period. Your lender may also offer to modify your monthly payment amount to make them more affordable until you can get back on your feet financially.
Each lender has its own policies for people experiencing financial hardship, so contact your lender to see which options are available.
Cancel Extras First Then Refinance
If you’ve got both a high interest rate and some after-sales coverages to cancel, the smart move is to cancel the products first. Once your loan balance has been reduced, then work on the refinance. Doing both will reduce your monthly payment now and can potentially net you some significant savings in interest charges down the line, too.
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