How to Refinance an Auto Loan with Bad Credit

You will not be able to secure better terms when you refinance an auto loan with bad credit. If your credit is the same as or lower than it was when you took the loan, then you will see similar or worse quotes today. As such, there are two key scenarios where it makes sense to refinance with bad credit. The first is a change in the credit market as a whole. The second is refinancing in order to prevent default. 

Refinance due to Market Changes

Your personal credit is just one part of the equation when it comes to the terms you receive on a loan. The other major factor is the credit market at the time. In a slow credit market, lenders are tight with their money. You may not be able to even get a loan with bad credit; if you do, you will have to pay with high rates and bad terms. The market may improve while your loan is still active. You could approach lenders with no change to your personal credit and receive better terms. 

This occurs following a recession when the credit market loosens up or strengthens. Low credit borrowers will not see the same penalties as they did during the recession or slow market. If you note this change, it will likely be accompanied by a rise in the national prime rate. Because these two things come hand in hand, it is best to attempt to refinance just as the market begins to turn, but before the new prime rate has climbed too high. You will know the right time by actively seeking quotes from other lenders and noting when those quotes are most favorable.

Refinance to Avoid Default

If you are nearing default on your auto loan, your credit may not be a large concern for your current lender. Lenders lose money when you default, so they may be willing to negotiate to keep your loan alive. Even if your credit has dropped since taking your initial loan, a lender may still be open to refinancing in order to help you keep your car and your loan. You will not be refinancing to better terms. Instead, you will be refinancing to a monthly payment and interest rate you can afford in order to avoid default.

In this case, it is essential to contact a lender immediately as soon as you fear default is possible. Do not wait until you have missed payments because this will reduce your bargaining power with the lender. File a hardship letter explaining the circumstance that is preventing you from fulfilling your current contract. For example, you may explain you lost your job or suffered an illness that is keeping you from working. You should then propose the monthly payment that would allow you to keep the loan active. You should know reducing a monthly payment will typically raise your rate and the expense of your loan. However, the added expense is often worth the hassle in order to avoid default. 

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