Bad Credit Auto Refinance Guide

The most disconcerting thing about bad credit auto refinance is that it does not happen enough. People with bad credit, no matter the reason for their poor credit rating, feel as if they are lucky to have gotten the loan in the first place. Another reason that bad credit auto refinance does not occur as often as you would think is that consumers with good or bad credit simply do not understand that they can refinance their car loan. Moreover, many consumers, wrongly, think that the original loan they obtained when they bought their car, whether a new car or a used car, is the best deal they can hope to get. These things are simply not true.

Every day consumers are taken advantage of by unscrupulous car dealers and finance companies, during the car buying process. More often than not, they are convinced that the high interest they pay on their auto loan is standard for the industry. Whether you have good credit or bad credit, you have, at one time or another negotiated a really bad deal when buying a car. This is particularly true for car buyers with bad credit.

People with bad credit are the worst negotiators. Why? Because, they are negotiating from a position of weakness. Even worse, consumers with bad credit know they are negotiating from a position of weakness and are willing to admit it. The simple fact of the matter is that car dealers and finance companies want to make money and have no financial incentive to present you with the best loan. Just because you made a bad deal when you originally bought your car, and you have bad credit, is no reason that you cannot work through the bad credit auto refinance process and negotiate a better interest rate and loan terms.

What Is bad Credit Auto Refinance

When purchasing a car a common problem involves an initial loan with an exorbitantly high interest rate, upwards of 24%. Initially a car buyer may agree to these high interest rates, believing that they have to because their credit is not top notch. Or, simply because they do not understand that they can negotiate the interest on their car loan as well as the price of the car.

It used to be that “refinancing” was frowned upon. Lenders would hint at the idea that refinancing would negatively affect your credit rating. Car dealers perpetuate this misnomer because it is in their best interest – they get a piece of the loan. Refinancing a car loan has never been bad. But, like so many other things this myth has taken on a life of its own. So, the idea of refinancing a car loan is not first and foremost when thinking about trying to save money. This is a particularly strong sentiment for consumers with bad credit. Working through the bad credit auto refinance process is not something that many people with bad credit ever think about. They go on blindly paying crushing interest rates.

Simply put, bad credit auto refinance is the process of moving your subprime auto loan from the original lender to a new lender. There are obviously a few more steps in the process. Once you sign the refinance agreement with the new lender, they will pay off your loan with the old lender. The old lender releases it lean on the car and frees the title to the car. A new lien is placed on the car with the new lender and the title of the car is transferred to the escrow account of the new lender. All this goes on behind the scenes after you agree to the new loan.

There are more reasons to refinance out of a bad credit auto loan than not to refinance. Here are just a few of the best reasons:

• You should be able to get a lower interest rate. Otherwise what is the point of refinancing.

• Lower monthly payments. Lower monthly car payments will leave extra money in your pocket.

• Save on the total interest paid on the loan. This will depend the term of the new loan.

• Will help correct credit problems. Remember you are fully paying one loan and creating a new loan. At first your credit will take a slight hit. But, in the long run this will help boost your credit score.

• May help avoid bankruptcy if it is part of a broader consolidation package.
• The new repayment schedule will give you a full 30 to 60 days where you do not have to make any payments on the car.
• Can negotiate a better set of terms and conditions. For example could negotiate a lower, or shorter term prepayment penalty.

If your credit score is better than when you originally bought your car, then you should absolutely consider refinancing. If you truly have bad credit 550 to 600 FICO score then a bad credit auto refinance will not drop your interest a tremendous amount. But, if the interest rate on your original car loan was 16% and with a new bad credit auto refinance loan you were able to get the interest down to 10% you could save several hundred dollars a month.

Another point, worth considering is how the refinance will affect your credit. To some extent your primary goal in working through a the bad credit auto refinance process is to have a positive effect on your credit. If you have had your current loan for a few years and then you refinance it. You are in essence pay the old loan off in full. This will have a positive effect on your credit rating.

The goal with refinancing your auto loan is to put you in a better financial position than you were in before you refinanced. Don’t let the amount of work involved dissuade you from making a decision that is in your best financial interest.

Refinancing your car loan when you have bad credit is not easy. But, if you are prepared to do the necessary work you can make it pay off in the long run. Do not depend on the finance company or a broker to do the initial work for you. You should know several things:

• What are the prevailing interest rates, at different credit scores?
• Which finance companies are offering the best rates?
• What you credit score is?

Armed with these three pieces of information you should be in a strong position to determine if you are being taken advantage of. When you are negotiating do not be scared to reject every deal brought to you. Do NOT BE INTIMIDATED. The finance company your are working with will find the best deal for you. If they don’t come up with a deal you like, move on down the road to the next finance company. There are hundreds of local finance companies that will compete for your business.

Lenders that are willing to provide bad credit refinance auto loans know that they are taking a risk. But, they also know the interest rates that can charge for providing these high risk loans will more than make up for the risk. That does not mean they are not going to make you jump through hoops to be approved. However, it is much easier to qualify and get approved for a refinance loan than a newly originated loan. By having paid the original loan in a timely manner, you mitigate the potential risk associated with approving your loan refinance application. Although you have been paying on time lenders will still want a bevy of information about you and the car you want to refinance. If you saved copies of your original paperwork filling out the new applications should not be very time consuming.

Lenders will want to know several things about you and your car before approving your bad credit refinance auto loan. Loan qualifications will be different for each lender. But, there are a few generalizations that can be made.

Do You Qualify?

1. You must be at least 18 years old.

2. If you have declared bankruptcy it must have been discharged. Many banks will require a minimum time between the when your bankruptcy was discharged and when they will approve you for a loan. Different lenders have different time periods, usually between 1 and 3 years.

3. If you have repossession on your credit report it must have been more than a year ago. Sometimes there is a longer time period associated with repossession; the time period is rarely shorter.

4. Gross income must normally be at least $1600.00 per month.

5. Normally, you are expected to be up to date on all other bills and debts.

6. Must have held the other car loan for between 3 to 12 months. Basically, they want to know you can pay the loan.

7. Must be a legal resident of the area you are originating the loan in.
   

8. You will need to provide a minimum of two years documentation showing residency and employment.

Does Your Car Qualify?

1. Most lenders willing to refinance a car, much less originate a bad credit auto refinance loan, will limit how old of a car they will refinance.

2. Although, in general these lenders are more concerned about the amount you owe on the car than the value of the car, they will not normally refinance the car if you owe more than it is worth.
3. Most lenders will not refinance a badly damaged or deteriorated car.

4. Subprime lenders tend to shy away from commercial vehicles.

5. Normally the car must be registered in the same state that you live. Some lenders put a minimum time period on this.

If you are able to adhere to all the qualifications outlined in the previous section then your chances of closing a bad credit auto refinance loan are very good.  The fastest ways to have your application denied are to ask to borrow more money than is needed to pay off the old loan, not using the same name or names to apply for the new loan (in other words, if the original loan was in your and your wife’s name then the refinance application needs to have both names on it.)

Bad credit auto refinance loans can have several positive effects on your finances and credit rating. If you are approved the reduction in monthly payments can be significant. Successfully, paying off one loan, although you are immediately opening a new loan account, can begin the process of correcting negative issues on your credit.

Bad credit refinance loans, in general, should be used carefully. They are high risk loans for both the lenders and the borrowers. If you fail to make a payment on time there are likely to be heavy penalties. In my opinion the pros far outweigh the cons with bad credit auto refinance loans.