If you’ve purchased a new or used car, and you have bad credit, chances are that you’re paying a pretty high interest rate. Depending on your credit score, you may have an APR of 15-25% – which will result in you paying much more than the value of your vehicle in the long run.
What’s the best way to avoid paying enormous sums of interest? Refinancing your auto loan, of course! Let’s take a look at refinancing, why it’s a good idea for people with bad credit, and some tips on how to get your auto loan refinanced.
What Is Refinancing, And Why Is It A Good Idea?
Refinancing is pretty simple. When you buy a car, you’re locked into a loan contract with one particular lender. That’s who you make all your payments to.
When you refinance, you choose a new lender. That lender pays your loan in full, and then you repay the new lender, usually at a lower APR (interest rate.)
This is beneficial for both the new lender and the old lender. The old lender benefits because they have already gotten quite a bit of profit from the interest on your loan, and once it’s paid in full, they won’t have to worry about your account anymore.
The new lender benefits because they will profit from your new interest rate, and the loan is usually less risky because much of it has already been paid off.
Refinancing is a good idea because it can lower your monthly car payment dramatically, and reduce the overall cost of your loan substantially.
For example, a 5-year, 25% APR loan for $15,000 will end up costing you $26,000 if you make all payments as scheduled. If you can get that down to even 10%, you’ll save more than $7000 over the life of your loan.
Tips On Refinancing With Bad Credit
Usually, you shouldn’t try to refinance until you have a reasonable credit score – over a 600 FICO score is usually a good place to start. Here are some tips on how to refinance with bad credit.
- Ask for a quote from multiple lenders – Every lender uses a different model to approve (or deny) refinancing. This means that you should turn to a few different lenders, even if one or more of them deny you for refinancing.
It’s best to do this all at once. When lenders check your score to see if they will lend you money, your credit usually drops by about 10 points. But as long as all of these checks occur within the span of about a week, your credit will only be negatively affected once.
- Higher-APR loans may be worth it to rebuild your credit history – Keeping your high-APR loan for up to 6 months may be worth it, if you need to rebuild your credit score.
Making on-time payments on a car loan, credit card, and your monthly bills for just 3-6 months can often help you score rebound by 100 points or more, though this will vary based on your own financial situation.
- A co-signer can help you get approved – If you have a relative or loved one willing to co-sign your refinanced loan, you may be approved for a very low interest rate.
Your co-signer will need a FICO score of 700+, as well as proof that they can make all of the loan payments if you default – bank statements, pay stubs, etc. are usually required.
If you default on your loan, your co-signer is on the hook for the entire loan amount. So don’t do this lightly. If you know you can control your finances, it’s a good idea so that you can get a lower rate – but ensure that you’re not going to end up harming the credit or finances of your co-signer.
- Lower loan balances are more appealing to lenders – Even if you have bad credit, you may be able to get your loan refinanced if you’ve already paid most of it off. This is because the lender knows the monthly payments will be manageable, and lower dollar-value loans are lower-risk.
Consider making large monthly payments on your loan to reduce the principal that you must pay off. This will make you more attractive to lenders when it’s time to refinance.
Refinance Your Car – And Take Control Of Your Finances!
When you refinance your car, you can lower your monthly payment as well as the total cost of your loan, so it’s a good idea to refinance ASAP if you’re eligible.
Not sure you can even get a car loan with bad credit in Canada? Don’t worry. At Ride Time, we offer great deals on affordable used cars. And with a network of 15+ lenders, we can get you approved for a reasonable loan, even if you have bad credit.