When you have bad credit, you may think that there’s not much financial options available, especially when looking for an auto loan. Fortunately, there’s something called refinance auto loan. Even with bad credit, people can still use this option if they want to save some money by extending the maturity date of their auto loan.
What Does Refinance Auto Loan Mean?
When you take a car loan, it is not always guaranteed that your every payment will go smoothly. A refinance basically means that you are revising your payment schedule by paying and replacing the old loan with a new one that typically extends the loan’s maturity date, defines a new monthly payment amount, or has new interest rates. A refinance auto loan also places the vehicle as a collateral.
If your financial situation is slowly deteriorating or has already come to the point where you get a bad credit score, then getting a refinance auto loan makes sense to help take the pressure off in making monthly payments
When Is the Perfect Time to Refinance an Auto Loan?
As soon as you get a better credit score, you should try applying for a refinance since this would mean lower interest rates on your auto loan. Generally, people with poor or bad credit are given two-digit interest rates which can cause a significant dent on your finances. By getting an improved credit score, you’ll have a greater chance to renegotiate your interest rates to a single digit.
Similarly, you should do refinance if interest rates have dropped since purchasing the vehicle. For example, if you had taken an auto loan last year worth $25,000, payable in five years with 7.75% interest, but found that new interest rates had dropped to 4.75%, then refinancing the balance would yield, at most, a $28.60 savings on monthly payment.
However, there are specific limitations in refinancing an auto loan. If the value of the vehicle has already depreciated or the car itself is already old, then you should steer away from refinance options as it will just get you stuck on what is normally called an upside-loan or a loan that has a bigger value than the your collateral (which is the vehicle).
You should carefully calculate your options when considering a refinance auto loan. Have an open discussion with your automobile financing company to get better monthly payment options when refinancing to be able to save some cash.
Why You Should Never Do a Cash-Out Auto Refinance, HuffingtonPost.com
Car refinancing: Risks & benefits of auto loan refinancing, ChicagoTribune.com