Making your payment month after month has gotten to be such a drag that it eventually occurs to you: “Is there any way I can get out of this loan?”
First of all, what is a bad car loan? The simplest answer is that it’s one you can’t afford or one where you’re paying more than you have to.
You might be wondering if there’s any way you can keep your car but pay less each month. The answer is, it depends. To explain further, let’s take a quick look at your loan.
Your car payment is made up of three main parts:
- Principal: The amount of money you borrowed, excluding interest, to buy your car.
- Interest: What the bank or lender charges for loaning you the money.
- Term: The amount of time you have to repay the loan.
Of these three parts, the interest and the term can be adjusted to reduce your monthly payment. To do that, you need to create a new car loan, a process called auto refinancing.
Review your car loan
To see if refinancing will work for you, begin by finding your sales contract or payment stub. Now, find the interest rate you’re being charged and the term, or the number of months remaining on the loan.
If you prefer, you can simply call your bank or lender, give them your loan number and ask for this information. They’ll also tell you the remaining balance of your current loan, which you’ll need soon.
Once you have found the current interest rate you’re paying, you can check your credit score to see what rate you could now qualify for. To get the current interest rate you qualify for, contact several lenders for a quote. If you can get a lower interest rate, you’ll be able to lower your monthly car payment.
Run the numbers
To see how much money you can save by refinancing, use NerdWallet’s auto loan refinance tool. At first, input a desired loan term that’s the same as your remaining loan term. Remember, this is the number of months you have remaining on your loan, not the length of the loan from the beginning. The refinance tool will estimate the interest rate you could get and show you how much that rate could lower your payment.
If you’d like to lower your payment further, see what happens when you extend the number of months in your new loan. However, it’s best not to spread the loan over too much time because you’ll then pay more total interest. Also, if you take too long to pay off your loan, you run the risk of being “upside-down” on your loan, meaning you owe more for the car than it’s worth.
When not to refinance
If your credit hasn’t improved, you probably won’t qualify for a better interest rate. Also, if you’re close to the end of your loan, the potential savings might not be worth the time to go through the process. True, you can still change the length of the loan if necessary. But that’s a last-resort option.
It’s also important to make sure there are no prepayment penalty fees in your current loan contract. Most car loans have no such charges, so you should be good to go.
There are other ways for you to deal with a bad car loan, although these options might not be as attractive as refinancing.
Sell your car to a private party: Advertise the car for sale and tell prospective buyers there’s still a loan on it. Once you find a buyer, call your lender and ask how to arrange the transfer. The new buyer will pay off the loan, and any remaining money will be cash in your pocket — or a down payment for your next car.
Sell your car to CarMax: A quick exit route is to take your vehicle to CarMax. They will appraise your car and give you a solid, no-haggle offer to buy it on the spot. Hopefully, the offer will be more than what you owe on the car. If you accept the offer, CarMax will pay off the loan and give you a check for the difference.
Skip payments: Call your lender and explain that you’re having a hard time making ends meet. Sometimes, the lender will allow you to skip one or more payments to help you avoid defaulting on the loan. Save the money from these missed payments and use it to meet your future payments.
Downsize at the dealership: You can trade your car in for a less expensive used car. But beware: Dealers can seem to work financial magic but actually are rolling your balance into a longer loan. Before you attempt this, know the trade-in value of your current car and the value of the car you want to buy. Review the contract carefully before you sign, and run the numbers through a car loan calculator to make sure they add up.
If you’re ready to apply for a new loan and you think you can qualify for a lower interest rate, it’s time to apply to refinance your car loan. Set aside an hour to fill out applications and another hour to review any offers you get. Keep in mind that reducing your monthly payment by even $25 a month will save you $300 a year. Not only that, but you’ll have the peace of mind of knowing you got the best deal possible.
Philip Reed is a staff writer at NerdWallet, a personal finance website. Email: [email protected].
Updated Sept. 11, 2017.