A bad credit car refinance can make a lot of financial sense, under the right conditions. This option can free up a lot of money or save money on future payments, as well as making the car loan easier to deal with a month-to-month basis. Here’s a list of a few good reasons to refinance your auto loan with bad credit.
Reasons to Refinance Your Car
1) Your Credit Score Has Improved
When a bank or other financial institution makes a bad credit car refinance loan they take many different factors into account. The credit score of the borrower is one of the most important factors. This number is meant to be an indication of how likely the borrower is to pay back the loan.
The bank doesn’t necessarily know why a person has a certain credit score – they just see the number. So when they see a person has a low credit score, they will charge a high interest rate to compensate for the potential risk of the borrower.
However, this rate is not set in stone. Making regular payments on an auto loan will improve the credit score of the borrower over time. Furthermore, as time goes on, events that reduced that credit score in the past start to drop off the credit report.
The bottom line is that people can improve their credit score from where it was when they first took out an auto loan.
If that is the case, choosing to refinance your car can save a lot of money. The reason is that under a refinance, the borrower can obtain a new loan that reflects their new credit score. The new loan can have a lower interest rate, which will save the borrower hundreds, if not thousands of dollars over the lifetime of the loan. The new lower interest rate you receive after you refinance your car will have lower monthly payments and will be easier to manage both in the long term and the short term.
The key is that your credit score is not a static number – it changes over time, so a bad credit car refinance can take advantage of a lower credit score to give you much better terms on your auto loan.
2) You Want Equity From Your Car
“Equity” refers to the difference in how much your original loan amount was and how much the underlying asset is actually worth. For example, if your car is worth $7,000 but you have a $5,000 loan on it, you have $2,000 worth of equity in the car. Equity also means ownership- it is the amount of the car that you own yourself, as opposed to the amount that the bank or lender technically owns.
A refinance can turn that equity into actual cash. Because a refinance is a brand new loan that replaces the old one, the refinance process can give you your equity as one big check. When you get a bad credit auto refinance from a company, they pay off your old loan and extend you a new loan that covers the remaining value of the car. If there is a difference in the size of the old loan and the new loan due to having equity in the car, the refinancer can give you the money.
Even if there is no difference in monthly payments or the interest rate, having the extra money from equity is always helpful. The money can go towards expenses or even back into the loan itself, to help you pay it off more quickly. In any case, having the equity out of the car in the form of cash is a handy trick that you can only get through refinancing.
3) You Want To Restructure Your Loan
Sometimes, the initial loan you get from a lender just doesn’t suit your budget, or your financial situation changes and you want to adjust your loan. A refinance can help you accomplish this.
For example, even if your credit score has not changed, although it has likely improved over the course of paying off the loan, a refinancing company might be able to get you a new loan with different terms. Extending the length of the loan can lower the monthly payments, making the loan easier to deal with month by month. However, this also means that you will pay more in interest over the course of the loan.
Be sure to examine all of the options carefully when thinking about refinancing a bad credit auto loan- there can be tradeoffs between short term gains and long term losses, or the other way around. But if you really feel that you need to reduce your monthly payments to fit your budget, contacting a refinancing company that specializes in bad credit auto loans like Valley Auto Loans can help you restructure the terms of your loan to better fit your financial situation.
4) You Want A Better Credit Score
Even if you are managing your current loan with your budget, if the loan payments are large enough to be burdensome and you fear that you might need to make a late payment or miss a payment in the case of an emergency, you might want to refinance your auto loan to protect your credit.
Refinancing as above to obtain a lower monthly payment makes it easier for you to ensure you will always make the payments every month. Making payments every month improves your credit score. This means that for any other time you need your credit score, such as taking out a home loan or other type of loan, you will be able to obtain a better interest rate.
Having a good credit score opens up many doors in terms of other financing channels, so it is important to have as strong a credit score as you can. For that reason, you could refinance your car to lower your payments can make it easier to boost your credit score: it shows banks that you are responsible enough to pay down your loan every month.
Should YOU Refinance Your Car?
A bad credit car refinance loan isn’t for everyone, but for those who think that one of the above reasons might interest them in refinancing their bad credit auto loan, Valley Auto Loan can help you through every step of the process. Valley Auto Loan has experience with getting its customers the best possible terms regardless of their credit score, so don’t worry about not qualifying for a refinance. Refinancing an auto loan is a financial transaction that you shouldn’t take lightly, but Valley can provide you with information and quotes about the potential benefit of refinancing your car with bad credit through us.Top Reasons To Refinance Your Car with Bad Credit in 2014 by Jordan L Bourland