For many people, an automobile is one of the largest life expenses they have. Car loans are often the largest debt they carry. As lives change and circumstances morph, the auto loan taken a year or two ago may not be the best option today. Just because the contract has been signed and you’re making payments doesn’t mean that it cannot be altered.
Fixing the bad parts of a deal isn’t impossible. Even if months or years have gone by since your vehicle purchase, you can still refinance or absolve a bad car loan. Here, we’ll look at what makes up a bad car loan, options for getting out of a bad auto loan, and how to avoid bad car loans altogether in the future.
Car loans are not mom’s apple pie, they can go bad before they’re gone. Almost any car loan can be a “bad car loan” if it’s 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 car’s purchase price was too high.
This is rarely the fault of the car loan itself, but of the vehicle and changing market values. Today’s good deal could be tomorrow’s ripoff. Sometimes it’s the vehicle itself, which may be more of a liability than expected. Sometimes it’s 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 loan’s APR is too high.
The annual percentage rate (APR) 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.
Quite often, dealerships will talk a buyer into additions, upgrades, or fees that add to the overall cost of the vehicle purchase and thus increase the car loan amount. Other times, the financing itself might have add-ons that were perhaps necessary at the time (such as insurance requirements or the like) that aren’t applicable now. Either way, too much is being paid.
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There are several ways to reconfigure, refinance, or outright get out of your bad car loan.
1. Sell the car. If you can sell the vehicle for the amount owed on the bad car loan, you can pay off the loan and be done with it. This is relatively complicated, given that your car’s title will have your finance company’s name on it instead of yours, but an understanding buyer may be willing to work with that.
2. Trade the car in on another one. Trading in your car that’s got a bad car loan and taking out a new, more favorable loan on another vehicle will pay off your current bad car loan. Most dealerships are more than happy to take in a vehicle which still has an outstanding loan and some will even lump the overage (what’s owed versus what it’s worth) into a new loan with better terms.
3. Negotiate new terms with the lender. It may appear that the lender has all of the power in a car loan situation, but most lenders realize that they’re better off with a happy customer who continues to make payments than they are with a disgruntled one who may miss payments or find another lender to refinance with. Most will work with current debtors to refinance or renegotiate a loan towards better terms. This is especially true if the debtor has struggled making payments as-is.
4. Refinance the loan. If your financial circumstances have changed, you can speak with a financial institution such as a bank or credit union about refinancing your current car loan. Some automotive loan specialists will also work with you to refinance a bad car loan. If you are underwater/upside down (owe more than the vehicle is worth), you may have to come up with the difference. It’s worth noting that canceling added services such as maintenance agreements and the like will lower your current loan total and make refinancing a little bit easier.
5. Surrender the vehicle. If circumstances have gone completely sour with your finances and you cannot make payments on a car loan, you should consider surrendering the vehicle voluntarily. You will be instructed about where to deliver the vehicle and what paperwork to bring when doing so. Most car loan companies will try to avoid this, but sometimes it’s the best course of action. Realize, however, that you will still be liable for any added costs or losses the company takes because of the surrender. Usually in the form of differences between what the vehicle can sell for versus what you owed and any towing or dealership fees associated. This will also have a negative impact on your credit record, so think carefully about going this route.
Read more on Bad Credit Auto Loans here.
The steps toward getting a better, renegotiated car loan or a refinanced loan are the same. The first step is to reduce the cost of the current loan. This can be done by canceling unnecessary added services like maintenance contracts and insurance services. Removing these lowers the total amount owed and makes getting a new loan easier.
The next step is to find out the prepayment penalty on your current loan, which may be nothing (usually the case) or may be a percentage of the overall interest that would have been paid for the life of the loan. You’ll be responsible for that prepayment penalty if you cannot negotiate it away. That penalty is often how lenders ensure their profit on the loan should your circumstances improve after the loan was made.
It’s best to avoid these kinds of stipulations from the get-go, but not everyone who takes out a car loan has that choice when the loan is being negotiated at the start. The prepayment penalty can be a few hundred or even thousands of dollars.
Next, find out the outstanding balance owed on the loan. This is usually called a “10-day payoff” amount, or the amount that needs to be paid inside the next 10 days in order to close the loan. The 10 days is the time before the lender adds a new section of interest to the balance and/or when the debtor is expected to have made another payment. Annual percentage rates are broken into payment portions, so a 12% APR rate means that 1% is charged monthly. This adds to the balance of the loan even as payments are made to subtract from it.
The next step is to see what the car’s current value is. Using vehicle appraisal tools online, you can get an estimate as to what the vehicle is worth both in an owner-to-buyer (aka “street”) sale and as a trade-in (or NADA wholesale). Most lenders will base their valuation of your car on something in between those two numbers. The closer your outstanding loan balance is to the NADA wholesale value of your car, the more likely you are to find a good refinance or negotiation deal for your current loan.
Finally, make certain to check your credit score. If your score is good (or at least much better than when you first financed the car), you will get better rates and have fewer issues gaining better loan terms. Some websites can also estimate what your likely interest rate will be based on your credit score and finance amount, giving you tools and information to verify that you’ll likely be better off with a new loan. You may also find things that you can do to improve your score, such as disputing some of the entries or paying off a credit card or other line of credit that might be pulling the score down.
Once you begin loan shopping or negotiations for refinancing your current loan, having the information above will go a long way towards getting a good deal. If the loan company can do a soft credit pull (if you're renegotiating a loan, this is likely the case), all the better, as a soft pull won’t affect your credit score.
Avoid going from lender to lender and doing full finance credit checks as multiple hard checks will lower your current credit score.
Read more on Average Auto Loan Rates here.
The most important thing to know before getting into a car loan is your own finances and reasonable budget. Know your maximum payment capability and stay under that number when negotiating the loan. Without knowing this, you will not be able to get a car loan that you can comfortably afford to pay. So many skip this step and end up in financial distress because of it.
Yes, life circumstances change over time, but don’t expect your income to go up sharply and act accordingly. Manage your finances and estimate your payment capability based on your current situation, not the future possibilities. Remember that having wiggle room in your budget (smaller car payments) will mean you can make added payments (improving your credit score) or save money for the future.
Next, know your credit score. This is the single most important factor in getting any type of loan, including an auto loan for a car. Your credit score is what the lender will use to estimate your capability of repayment of the loan–the most important factor to them. It’s very important to realize that the credit score you see is not a definite number, but a morphing, changing range of numbers. Some lenders will use the score from TransUnion, others from Experian, and some from amalgamations of things from your credit history. A credit score of 700 could be seen as 660 or 750 by any of these margins. The 700 is a rough average, but you will at least understand roughly where you fall in terms of what the lender sees. That’s important. Equally as important, seeing your credit histories with the three credit bureaus can give you insights as to what you might do or can immediately do to improve your credit score overall.
If you’re applying for a car loan with more than one lender, do so within a short time span. When lenders check your credit, it can decrease your score. One check will not likely change anything, but multiple checks will. But if those checks are for the same type of credit and are within a short amount of time (a week or two), the negative effect will be less as it’s clear you’re shopping for one loan and not trying to get multiple loans.
This is one of the reasons most credit experts will recommend getting prequalified for the car loan before shopping, as the shopping process can take a long time and may result in multiple credit checks over that time period, which can possibly negatively impact your credit score.
Prequalification has another big advantage. It means you know you can purchase the car when you walk onto the lot instead of wondering if you can afford it. You are armed with your maximum loan amount and that you’re already going to get a loan for up to that number. It also means that if the dealership wants to finance the loan or use one of their lenders, they will have to beat your pre-qualified loan deal first. This usually means they will have to find a lower APR, better financing option, and other things to sweeten the deal so you’ll give up your pre-qualified loan for one they can offer. That’s a win for you.
Understanding the costs of a car purchase before you begin shopping is a very important factor. On top of the window sticker price, you’ll 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, you’ll 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.
Don't settle for dealer financing, get loan quotes from multiple providers
Paying off the loan or selling the car are the easiest ways to get rid of a car loan. Trading the car in is another option.
If the car itself is bad, then consider your local lemon laws and find out if you can force the dealership to take the vehicle back or fix the issue. Otherwise, the only way to get out of a bad car purchase is to sell the car or trade it in for another one.
Yes. This is usually called a voluntary surrender. It’s similar to repossession, but without the costs and all the negatives of that. It won’t necessarily absolve the loan, but it will mean you no longer have the loan as a result.
Any company that has a good reputation, is willing to work with customers, and has a customer service department that responds quickly is a good loan company. Check reputations through the Better Business Bureau and with friends and family who have used the company before. Also read more about our 7 Best Auto Loans here.
If the vehicle has not been delivered or is within the window of return offered by local lemon laws, then yes. Most auto loans will have stipulations that detail when the buyer can back out of the loan.