Bad Credit? Tips for Refinancing Your Car




For some car owners, monthly payments can prove to be too much. Regardless of the circumstances, there’s just no way for these borrowers to pay their original lenders. What do you do? If you don’t pay the bills in a timely manner, you risk losing your vehicle.


If you find yourself in this hole, you should consider refinancing your vehicle. While the strategy certainly isn’t for everybody (as you’ll soon learn), it could still benefit a good percentage of car owners. Instead of ditching your vehicle and looking for bad credit car loans in Lexington, Kentucky, check out our guide to refinancing your car…


Understand Refinancing




When you decide to refinance your vehicle, you’re essentially swapping your car’s title from one lender to another. When you sign up with a creditor, there’s no obligation to stick with the deal. Instead, you can switch and find a more advantageous deal. There are several benefits to taking this route, and there are also several negatives. Let’s explore…


Understand the Benefits


Woman using calculator on desk full of bills and statements, close-up of hand


Where to start? There are several advantages to refinancing your vehicle.

For starters, it gives you an opportunity to make up for past mistakes. You may have originally secured an inauspicious deal when you agreed with your initial creditor. If interest rates were generally high when you had signed up, it’s certainly a good idea to refinance. As Colin Bird of writes, even if your annual interest rates drops by only one percent, it’s still worth considering. Jeff Ostroff of suggests following the one-percent rule, and if you find a deal that can save you at least that amount, you jump on it.

Even though the savings may seem minimal, it will actually save you a solid chunk of change over the lifespan of your vehicle. Bird uses a $35,000 vehicle with a six-year, 8.5-percent interest rate as an example. If you can refinance with a 5.5-percent interest rate (a 3-percent savings), you’ll end up pocketing $35 a month. Over four years, this will turn into more than $1,500, a pretty significant savings. This money will be sent directly to you, as your new creditor will send you a check to pay off the older loan.

What could this extra money do for you? The options are obviously endless, but it’s best to put this extra cash towards paying off your car. You could have enough extra money to pay off your vehicle in a shorter amount of time, and you could boost the value of your vehicle by visiting a mechanic or adding some modifications.

Furthermore, the consistent payments could improve your credit. This is certainly an option to consider if your score had previously been struggling.

“If your credit score improves, even by just 50 points, you should … refinance the auto loan,” John Ulzheimer, former president of consumer education, told Bird.


Understand the Risks




There may be some situations where a borrower needs to refinance their vehicle in order to reduce their monthly payments.  The risk in these situations is losing the vehicle altogether, and it’s worth the extra money and the longer payment plan to retain your car. However, if you’re simply looking to refinance to gain some extra pocket cash, you’d be doing yourself quite the disservice in the long run. While your monthly payments could be for less money, the loan will also last considerably longer. During the length of the agreement, you’ll ultimately be dishing out more money. While you may temporarily find yourself with some extra cash, why not just pay it off as soon as you’re able? It’s not worth the lost money due to time and interest rates.

“If you are turning a four-year loan into a nine-year loan, that’s not really a good idea,” Ulzheimer said.

Furthermore, you’ll want to refinance towards the beginning of a loan. Lenders aren’t going to be as willing to refinance an older vehicle considering the minimal resale value. By refinancing at the beginning of a loan, you’ll be getting the best value.

“Interest is front-end, or front-loaded,” Ulzheimer said. “It’s more advantageous to refinance at the beginning because that’s when you’re paying the most interest.”

Perhaps the biggest risk when refinancing are the potential penalties from your soon-to-be-previous lender. As Bird writes, these loan companies may force you to not only pay whatever is left on the principal, but also part of the remaining interest. Bird notes “pre-computed loans,” where the borrower is forced to pay the principal and the all of the remaining interest when refinancing. In these situations, the borrower will find little benefit. Overall, you’re likely to come across two main fees: a lien-holder fee (around five to ten dollars) and a state re-registration fee (around fifty dollars).


Understand How to Refinance


Salesman showing man a car


Ostroff points out the main things you’ll want to keep in mind as your pursuing a refinanced car. You don’t want to waste your or the financer’s time, so assure that all of these factors have been accounted for:

– The application for a refinancing loan has to be identical to your current auto loan. Same name, no errors.

-You’ll want to have your loan number (and any accompanying material) handy. You’ll also want to have every bit of information on your vehicle (Ostroff points to “the car’s year, make, model and VIN”).

-The lender will only seriously consider a refinancing worth more than $7,500. A lower value would not be beneficial to the creditor.

-Understand the value of your car. You can’t borrow more than the vehicle is worth.


Refinancing can be a bit confusing, but we’ve hopefully got you started on the right track. If you’re looking to reduce your monthly payments, you should consider talking to a new lender. Sure, there are several negative factors that accompany a refinanced loan, but in some cases, this is actually the best route. Just remember what you read above, and you shouldn’t run into any issues before or after having signed up for a new auto loan.