How Does Refinancing A Car Loan Work If You Have Bad Credit?
Refinancing a car loan is a stressful situation to find yourself in, irrespective of your credit score. While the process itself is actually much more straightforward and painless than some sources would have you believe, every financial decision is bound to carry with it a degree of stress, simply because of the magnitude of what you’re taking on as much as anything else.
And if you have a credit score that requires some credit repair work to be put in in order to make sure it’s as healthy as it can be, the stress of the situation is exacerbated still more.
Credit repair is a useful way to get your score back to a reasonable figure, and it’s simple enough that it can be carried out by everybody, but the process is by no means instant, and it could be a matter of some weeks before your score is high enough to prevent you from being shackled with a car loan that is going to seriously hamper your progress towards being a financially successful adult.
Put in basic terms, refinancing a car loan is a way to renegotiate a different deal on the same car you’re currently driving. It can be a great option if you’ve been working on credit repair, because as your score gets better, the deal you’re going to be offered by whichever dealership you’re working with is going to get better as well.
However, before we can get into the nitty-gritty specifics of what it means to renegotiate a new financing deal on your vehicle, we’re going to need to discuss what loans are, how lenders and buyers work together to hash out a loan deal, and how exactly having a less than perfect credit score is going to affect the kind of financing scheme you’ll eventually be offered.
Love it or hate it, your credit score is here to stay. As a matter of fact, it’s almost misleading to refer to the term in the singular, because while most of us simply consider our FICO score the surest representation of our financial health, the reality is that there are actually hundreds of scores out there.
Don’t get us wrong: FICO scores are important, and are the most widely used, so it’s not like you’re doing yourself a disservice by not looking up all the other scores that are attached to your name. As it happens, that would be an exercise in frustration, because every single lender uses a different score (usually it’s some combination of an algorithm of their own creation and the FICO scoring system).
Not to mention the fact that it’s practically impossible to even find out all of those scores; and at any rate, if you’re working on your credit repair, you probably already know how to go about learning what your credit score actually is.
But how do credit scores impact loans? And what kind of difference will a poor credit score make to an attempt to refinance your vehicle loan deal?
Loans For Laymen
Worded simply, a loan is an agreement between two parties: a lender (the dealership, in the context of negotiating a car financing plan) and the buyer (which is you, in this scenario). What the lender is doing when they agree to sell somebody a car on a financing plan is effectively giving another person money, with their word that the money will be paid back, in full and with interest, within a certain time-fame.
Credit scores have evolved as a way to guarantee the lender that they’ll get their money back. After all, they’re a lot stronger than somebody’s word, because defaulting on your loan or behaving financially irresponsibly in another way is going to tank your score, and will wreck any future serious purchases you may consider making.
A credit score can be thought of as an effective representation of the buyer’s history with regards to financial commitments: as such, a poor credit score (even one which is undergoing the process of credit repair) is going to represent a buyer who hasn’t historically been completely reliable, and as a result will present more risk for the lender.
The lender needs to offset that risk in order to make sure the deal can even happen in the first place. This has been happening for decades and is a process most everybody is familiar with to some degree.
They have two main ways to offset the risk they incur by lending money to somebody with a less than perfect credit score. These manifest themselves in the hard, black-and-white agreement of the loan itself, in two forms: the interest rate, and the terms of the loan itself.
Interest rates are represented as a percentage of the whole loan value and are additional fees that must be paid every month, along with the amount that goes towards the vehicle itself. As you’ll no doubt be aware if you’ve been getting going with credit repair on your own score, money paid as interest does not go towards the value of the car.
It’s essentially just a way to offset the risk incurred by the lender. So while your monthly payment will mostly be a way of paying off the total value of the vehicle in question, the interest rates won’t be doing that.
The higher the interest rate, the more the buyer has to pay in order to offset the risk taken on by the dealer. And the lower the interest rate, the more of their monthly payment will be going towards the value of the car.
Given all that we know now, it’s straightforward to conclude that the lower the buyer’s credit score, the higher the interest rate will be offered. The difference in interest rates on offer can vary drastically, from as low as just a few percentage points to up to as much as about a fifth of the car’s total value—around 19-20%. Interest rates could indeed have been one of the main reasons you decided you needed to get started with credit repair in the first place. Anybody would get sick of constantly paying high-interest rates.
The length of the loan is the other way your credit score might come back to bite you. The sooner you can get the car paid off, the better: that way, any time you have to make some sort of additional payment onto it (like repairs, for example), you’re at least paying towards something you already own.
If you get locked into a massive long-term loan scheme, you could well have to repair a car that isn’t even yours, which is obviously not the ideal financial situation to find yourself in. While the monthly payments will be lower on a longer-term loan, it’s important not to let this relatively small figure distract you from the bulk of what’s really happening.
So now we understand why somebody might want to perform credit repair. It’s a way to ensure that they’ll pay lower interest rates on any deal they’ll be offered, and it’s also likely to make sure that the terms they get on the loan itself are more favourable than otherwise. But how does this come into play when we’re talking about trying to refinance a car loan?
Refinancing A Car Loan With Bad Credit
If you’ve been working on credit repair, your score is probably a good deal better than it was when you first got the car you’ve been driving. As a matter of fact, proper application of credit repair techniques can start to work within the first few months of applying them, which essentially means that the very next credit report you get through the mail could reflect your new and improved score. And if your score’s better, you’d expect to be able to get a better loan, wouldn’t you? After all, it just makes sense.
It’s true, too. Plenty of people don’t know this, and imagine that they’re locked into a loan term for life, but just like you’d be able to shop around for different deals with your regular credit score, you’re also perfectly within your rights to try and negotiate an improved deal on the car you already own.
Even if you’ve still got a bad credit score, any difference you’ve been able to make to it by use of credit repair techniques is going to have a knock-on effect for the kind of loan you’ll be offered, so don’t be put off from trying to refinance your car loan just because your score isn’t quite where you’d like it to be yet. A better deal will be more financially viable for you, and that in turn is going to help your score keep improving when considering that it works in concert with the credit repair techniques themselves.
Lenders are also incentivized to help you renegotiate a new car loan, because it’s proof to them that you’re even more reliable as somebody to lend money to than you were before, and because they’ll appreciate your business as a customer and will want to stay on your good side. Even more than those reasons, however, they’ll be worried that you’ll go elsewhere looking for your new car loan, and they might lose all of the money you’ve been paying them for good.
Refinancing the car itself is fairly easy to do, once you’re sure that your credit score is healthier than it was before you started practicing credit repair techniques. Indeed, the longest and most irritating stage of the process is simply figuring out what on Earth your credit score even is. This is where you’ll have an advantage over the average punter, because you’ll already be familiar with your credit history on account of having practiced credit repair.
Once you’ve got all the necessary documents and you know what the story is with your credit history, all you need to do is shop around between different dealerships and compare the various refinancing agreements you get offered. Once you’ve got around six or seven, it’s time to go home and break out the calculator in order to get down to the hard facts about which loans are going to be best for you, and which you’ll actually be able to work into your current budget structure.
While refinancing a car loan with a bad credit score isn’t necessarily going to be as easy as if you had a great score, it’s still possible, and in many cases, it’s even recommended, especially if you’ve been working on credit repair and you’re confident you can get a better deal. Don’t be put off by all the nay-sayers: it can’t hurt to do some research into the area. After all, you’re saving yourself money.
By the way, here at autoloans.ca we take a serious look at every single application we get for a new loan. We don’t turn people away just because they’ve got a bad credit score, so why not consider giving us a call and seeing how we can help you out?