5 Easy Steps to Get Out of a Bad Car Loan
Whether it’s due to buyer’s remorse or being upside down on your loan, nothing can be more exasperating than having a bad car loan. It hurts your finances and brings financial worries that quickly saps all your energy.
How did you even get yourself in such a mess? Things started well, or so you thought. You were initially ecstatic after being approved for the car finance, signing the papers quickly and driving the car out of the dealership like a kid in a candy store. One year later, you realized you’ve made a huge mistake and you’re starting to find a way out of your debt.
Bad Car Loan
A bad car loan can be due to several reasons:
- Buyer’s Remorse. This is the feeling of regret after making a purchase. Although the remorse can stem from trivial things like the colour or brand of your vehicle, it is often rooted in buying an expensive item that cannot be easily reversed like the car itself.
- Unfavourable Loan Terms. Sometimes, the excitement of owning a car causes you to overlook many important details in the contract, including outrageous interest that was not discussed prior to contract signing, unnecessary add-ons, very high prepayment penalties, loan terms that were not the same in your pre-approval and mandatory arbitration clause in the fine print that prevents you from taking any legal matters to the court.
- Getting Upside Down on the Loan. This happens when the amount of money you owe on your car has gotten higher than the value of the car itself. Note that a car’s value depreciates over time. If you buy it through a car loan with a little or no down payment at all, you owe nearly its entire amount. However, since the car gradually loses its value the moment you drive it off the lot, it won’t cost the same amount in just a few weeks, months and years. The longer the term of your loan, the lower your car’s value becomes and the more you get upside down.
Fortunately, there are several ways you can do to get out of a bad car loan.
1. Refinance your car loan.
If you’re looking to keep the car but do not like the terms of the loan, you can apply for a car loan refinancing. This process involves acquiring a new auto loan to pay off your existing loan. If you refinance your car loan from a new lender, they will pay off your current balance and you start making monthly payments on the new loan. If you refinance your car loan from the same lender, however, the balance on your existing loan will be carried over to the new loan and your payment term will be extended.
Despite its advantages, however, a car loan refinance only works if your credit score has improved from the time you applied for your previous car loan. This is because your credit score greatly affects the interest rate and terms of your loan. Your car refinance loan should have a lower interest rate and more favourable terms. This will put you in a better position of making on-time monthly repayments and eventually completing the loan.
2. Trade-in your old car for a new one.
When you’re not happy with the car you bought or it’s quite expensive and you can no longer afford to make the monthly repayments, you can trade it for a new or affordable one.
Trading in a car with a loan balance works best if your car’s value is higher than the amount you owe. You can pay off your loan and use the remaining balance towards your new car purchase.
If you owe more than the dealership is willing to pay for your trade-in, pay off the remaining balance on your own. You can also roll your remaining balance into your newly purchased car loan. However, this set-up will most likely put you upside down on your new car loan. Thus, you will need to work hard to pay down the balance quickly.
3. Get a personal loan.
You can use a personal loan to settle your existing car loan. Your lender will pay off your loan balance while you make the monthly repayments to them.
However, avoid getting a personal loan that has a higher interest rate than your existing car loan. You could only be trading debt for debt. You may have gotten out of the bad car loan, but you’d be unable to get out of the debt cycle.
4. Sell your car.
If you are in the brink of loan default and car repossession, your best option might be selling the car. Use the money to pay off your loan balance. Remember, however, that the car’s value depreciates and you still might not make enough money from selling it.
You can sell your car to the lender for its trade-in value but you will still owe on the loan. Get your car appraised to know its worth should you decide to trade it in. Alternatively, you can sell your vehicle to a broker or a private party, hopefully for a price that’s close to what you paid for it.
5. Turn the car over to your lender.
If repayments seem impossible, it’s wise to turn your vehicle over to the lender before it gets repossessed. Ask them to waive the outstanding balance in exchange for the car. Ask them also to not report any information on the car loan transaction to the credit bureaus. This will keep you from having a repossession record in your credit profile. It will also save you the cost of towing and storage fees.
Getting out of a bad car loan is easy as long as you are informed and you know where to go for help. At Loans For People with Bad Credit, we help Australians get sustainable finance options regardless of their credit ratings. Get a Bad Credit Pre-Approval today or call 1300 769 384.
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