Learning why your current car loan isn't working for you can help determine the steps to take to get out of it. There are a few different "bad" situations you might find yourself in when it comes to an auto loan, and a few different ways to set things right. Let's take a look.
Bad Car Loan #1: Sky High Interest Rate
When you're facing an interest rate in the double digits, it's no wonder you think you're stuck in a bad loan. If your interest rates are in the double digits, don't fret – you're not alone. In fact, the current average interest rates run as much as 14.59% depending on your credit.
Interest rates can really pile up the cost on your car loan, for example: If you're financing a $15,000 vehicle at a 14.59% interest rate (average deep subprime borrower) for five years, you're looking at an additional $6,218 in interest charges alone.
The Solution: There are a few ways you can go about trying to get a lower interest rate, including refinancing your car or trading it in for a lower-cost loan. In order to refinance, you have to have good credit, or at least have a better credit score than when you took on the loan. If you think a different vehicle would suit you better, trading in for something more affordable is the way to go. The less you borrow, the less there is for interest to accrue on.
Bad Car Loan #2: Outrageous Monthly Payments
If your monthly car loan payment is hard to scrape together due to its amount, first, you need to know why your monthly payments are as high as they are. Can you truly afford the vehicle, or is it beyond your budget? Maybe you opted for the shortest loan you could get? Is your interest rate contributing to a high monthly loan cost?
The Solution: In this case, the solution depends on the reason your car loan payment is high. If you truly can't afford the payments on your vehicle, trading it in for something more affordable makes sense. However, if your loan term or interest rate is giving you the headache, refinancing could do the trick and could be fairly simple if all you want to do is extend your loan term. If there are no prepayment penalties in your contract, you can also make your payment more affordable while saving money in interest charges by splitting your payment.
Bad Car Loan #3: Longest Loan Term Ever
Long loan terms are pretty common these days when it comes to car buying. However, the longer your loan term, the less chance you have of retaining a high amount of equity in your vehicle, and the more interest you pay over the course of your loan.
Auto loans typically carry a loan term of two to eight years and are expressed in months. This means your loan term is likely to be something higher than 60 months (five years) if it's feeling like it's dragging on unnecessarily, or that it will take you ages to pay off.
The Solution: When you have a long loan term, you can really rack up excessive interest charges. In this case, though, you don't have to do anything special. If you want your loan to be paid off earlier than it's due, you can simply make payments whenever you can to knock down your balance. However, if you had to take on a long loan term to make your payment affordable, the vehicle you're driving is likely outside your budget. Using it as a trade-in could be the way to go.
Bad Car Loan #4: Drowning in Negative Equity
Negative equity is when your loan balance is more than the value of your car. This can happen in many situations and is quite common when you first purchase a new vehicle since depreciation (loss of value) begins to happen as soon as you drive a new car off the lot.
Depreciation is only part of the negative equity equation, though. You can combat this from the start of your loan by making a large down payment. This decreases the chance of you staying in a negative equity position for too long. If you need to get out of the car you're in, but are upside down on your loan, you may need to make some tough decisions.
The Solution: When you have negative equity in your vehicle, it's not as simple as just trading in your car for something else. If the value of your car isn't enough to cover the cost of your loan, you're stuck paying the amount of negative equity out of pocket. Refinancing typically isn't an option when you're underwater on your loan. If you need out of your current car, you may find a lender that allows you to roll over your negative equity into your next loan. Be careful doing this, because it means starting your next loan in an even bigger negative equity position.
The Common Thread
The common thread in all these situations is typically bad credit. Bad credit borrowers are likely to experience these scenarios more often than consumers with higher credit scores. Bad credit is generally considered a credit score of 670 on the FICO scoring model, the most commonly used among auto lenders.
In each of these situations, working with the proper type of lender for your situation is key. In most cases, this means getting a bad credit car loan through a special finance dealership. These dealers are signed up with subprime lenders that look at more than just credit score to determine your eligibility for an auto loan.
We Got Your Back!
If you're not sure where to start getting out of your bad car loan, and into one that works better for you, we want to help. Here at CarsDirect, we work with a coast-to-coast network of special finance dealerships. You can also research vehicles on our new and used car pages, or fill out our fast refinancing request for a chance at better terms on your current car.
If you simply need to find a special finance dealer in your area, we've got you covered here, too. Fill out our free car loan request form and we'll get right to work matching you with a dealership in your area.