If you thought it was stressful securing a bad credit loan, imagine the uneasiness if you find yourself stuck with a not so advantageous deal. Often times, this means that consumers are unable to afford their monthly payments, leading to the loss of their car and negative effects on their credit score.
However, the worst situation an owner can find themselves in is owing more money on their car than it’s actually worth. Referred to as being “under a loan,” the reduced value of the used car may be less than your financial obligation, putting you in the worst possible financial situation. Fortunately, there are several steps that you can follow to remedy this issue. While success varies, it could at least save you some money as you’re looking to improve your financial situation.
Below, we’ve reviewed several of these notable steps, which should allow you to get out from under your car loan. When you’re finished reading, you’ll be better prepared to deal with that bad credit loan…
Step #1: Understand Whether It’s Even Necessary
The entire process of getting out of a bad car loan is tumultuous and risky. If you follow the plan, then you shouldn’t see many issues. However, if isn’t necessary for you to get out from under a bad car loan, it might not be worth the effort.
The best way to determine your course of action is by finding a definitive value for the car in question. Consumers can rely on a number of resources as they’re looking to secure this information, including Kelley Blue Book or Craigslist. If you find that the value of the vehicle is lower than what is still owed on the car, then it might be time to start devising a game plan.
Step #2: Pursue Refinancing Options
If you are looking to get out from under a bad car loan, then your first course of action should be pursuing some type of refinancing option. By pursuing this route, you’ll have the opportunity to reduce those monthly payments, interest rates, or any other applicable fees and charges. Of course, this is easier said than done, especially if you’re struggling with a poor credit score. Banks, credit unions, or even dealerships might not be willing to take the risk, and their offers will ultimately provide few improvements to your current terms.
So what do you do in this situation? While it might not help you immediately, the best course is to slowly build up your credit score over time. Once your financial situation is in good standing, you’ll be in a better place to pursue that advantageous deal. One of the best ways to go about doing this is by signing up with a private bank or credit union. Once you’ve proven that you can make payments in a timely manner, the institution might be more willing to help you.
“Some consumers assume they won’t get a loan because of their credit history,” Chris Kukla, the senior vice president of the Center for Responsible Lending, told Miranda Marquit of MagnifyMoney.com. “If you already have a relationship with a bank or credit union, you might discover they are willing to work with you on an auto loan refinance.”
Step #3: Renegotiate Current Terms
Did you fail to find a bank or credit union that was willing to refinance your loan? Then approach the dealership (or original lender) about renegotiating the terms of your current deal. Presumably, a customer will have the most issues with the applicable interest rates, as this extra expense is presumably why the monthly payments are unrealistic and unaffordable. On the flip side, the interest raters are one of the major incentives for dealerships providing financing in the first place, so you might find that they’re unwilling to renegotiate these terms.
However, you might discover that they’re willing to budge in regards to the loan’s terms. For instance, assuming you can make the payments, you could look to shorten the length of the contract, thus reducing the interest rates. Of course, this all depends on your financial situation, but it’s still a strategy that’s worth pursuing.
Step #4: Wait it Out
Assuming your vehicle is several years old, the value of the ride isn’t going to decrease rapidly. Rather, the value of the vehicle will eventually plateau, providing you with some extra time to get out from under the loan. In other words, if you continue to make your payments in a timely manner, you’ll find that the value of the car will eventually exceed how much you still owe. Plus, many automotive experts say the best route is paying off the car in full (over time, of course), which means you’ll have an operating vehicle without monthly payments. In this scenario, drivers can start to save up for a replacement.
“Every month that you keep the car [after your loan is paid off], you’re not making car payments, so that’s money you can put into savings,” Greg McBride, the chief financial analyst at Bankrate.com, told Sarah Shelton of U.S. News & World Report. “When you go to buy the next car, you’ve got some equity in your trade in and you’ve got money for a down payment.”
Step #5: Sell the Car
If all of your options have been explored, then the only realistic course of action may be to actually sell your ride to the highest bidder. Yes, this means you will be sacrificing some money, as you’ll surely still owe money on the original loan. However, by securing this extra cash, you’ll be able to get out from under your financial obligation quicker, meaning you can begin pursuing a replacement vehicle. This could be a considerable risk, as you’ll need some alternative transportation for the time being. However, if you must get out from under that bad car loan, this might be your only logical option.
At the end of the day, it will ultimately come down to finances and numbers. If selling the vehicle makes sense long term, you shouldn’t think twice about pulling the trigger.