With average payments for new vehicles climbing higher and higher, it’s no surprise that many people are finding themselves in a bad car loan. If your monthly payments are eating into your budget or you’re interested in a new vehicle with better rates, it might be time to get out of your current car loan.
What Makes a Car Loan Bad?
How do you know if you’re stuck with a bad car loan? Let’s take a look at some of the key characteristics:
New car selling price was too high
The first sign of a bad car loan is an inflated selling price on the new car itself. In many cases, dealerships will inflate the sticker price of a vehicle to leave room for negotiating.
If you didn’t have a firm understanding of what the car was actually worth, you might have paid more than you needed to. That’s why it’s important to do your research ahead of time, so you know what to expect.
Low trade-in amount
If you traded in your old car as part of the deal, hopefully you made sure that you didn’t get ripped off on the trade-in value. Again, researching before heading to the dealership to get a good idea of your old car’s value is essential. That way, you’ll be less likely to accept a lowball offer from the dealer.
Long loan term
A loan term that’s longer than average is another red flag. This means you’ll be making payments on your vehicle for a long time, and could lead to you being upside down on your loan. This is where you owe more on your loan than your car is worth.
Also, some loans have a prepayment penalty, so even if you can pay off a long term loan early, you’d have to pay the penalty. You can check with your lender to see if your loan has one or not.
Car loan APR is too high
The APR is possibly the most important aspect of financing a new vehicle purchase. This is the yearly interest rate on your loan and includes any fees or additional costs the lender charges. It can vary quite a bit from lender to lender. A higher APR means you’ll pay more interest over time, so shopping around for the best rate is essential before deciding on a loan.
Expensive extras
In many cases, dealerships upsell you on extras in the finance department. These things can add hundreds or even thousands of dollars to the overall cost of your loan, so it’s important to ask questions and ensure you understand exactly what you’re paying for.
In some cases, these extras might be worthwhile — but in others, they’re nothing more than expensive gimmicks.
Bait and switch
Some predatory auto lenders will get you to agree to a set of terms, but when it comes time to sign the loan, the loan has different terms and conditions than what was discussed. This is why it’s important to read your loan before you sign it, and make sure you understand what the terms of the loan actually are.
Best Way to Get Out of a Bad Car Loan
Refinancing your car loan is a great way to save money, get yourself into a better financial situation and get out of a bad car loan. It’s not right for everyone, but it is an option worth considering if you find yourself in a difficult car loan situation.
What is refinancing?
Refinancing is the process of taking out a new loan to pay off an existing loan. For example, when you refinance your car loan, you might be able to secure a better interest rate. If it’s significantly lower, this can save you a lot over the life of the loan. You might also be able to extend the loan term, which could reduce your monthly payments.
Why should I refinance my car loan?
There are a few reasons why refinancing your car loan is a good idea. First and foremost, it can save you money. A lower interest rate means that you’ll pay less interest over the life of the loan, and extending the term of the loan can also help lower your monthly payments.
Additionally, refinancing can help improve your credit score by allowing you to make on-time payments over the life of the loan. Use our refinance car loan calculator to see how much you could save by refinancing your car loan.
When should I refinance my car loan?
The best time to refinance your car loan is when you have improved your credit score or interest rates have dropped.
For example, suppose you initially secured a loan with a high-interest rate. In that case, you might be able to get a lower rate by refinancing. Or, if your credit score has improved since you originally took out the loan, you might also be able to qualify for a better interest rate.
But even if your score hasn’t changed and interest rates haven’t dropped, you may still be able to refinance to get better loan terms. This is why it’s a good idea to look into refinancing to see what you might qualify for.
How do I refinance my car loan?
The first step in securing new auto loan financing is to shop around for new loans. Then, compare rates and terms to find the best deal possible. Once you’ve found a lender who you’re comfortable with, the refinancing process is relatively straightforward.
You’ll simply need to fill out an application and provide some documentation, such as proof of income and employment history. The lender will then run a credit check and, if you’re approved and decide to move forward with the loan, disburse the funds to pay off your existing loan.
Other Options
What if refinancing isn’t an option for you? Then, there are a couple of other steps you can take to get out of your bad car loan.
Pay it off
Hopefully, your financial situation has improved since you bought your car. If so, you might just want to stick it out and pay it off. Once you do, you’ll have equity in your car. And then, you can put the money you were using to pay your car payment toward paying off other debt, or put it in savings.
Sell or trade in the car
If your car loan is not under water, you can try to sell it for what your loan amount is (or possibly more) or trade it in for a different car. First, make sure that your car’s value is the same or more than what’s left of your car loan amount.
A Bad Car Loan Is Not the End of the World
According to recently gathered statistics, 35% of Americans had car loans in 2019. This number is not expected to change as the need for personal transportation continues to grow.
If you’re one of the millions of Americans who have taken out a car loan, it’s essential to find out if you have a bad car loan and understand your options for getting out of it. Refinancing your car loan is often the best way to save money and get yourself into a better financial situation.
