3 Tips for Refinancing a Car Loan with Bad Credit History

You will need to give lenders extra incentives to take your  loan when you are refinancing a car loan with bad credit. Your credit score is the primary reason you would typically be able to get a lower interest rate. Since you do not have this advantage, consider the following tips to boost your ability to secure a lower rate despite bad credit.

#1 Set Funds Aside for High Monthly Payments

There are two primary reasons for refinancing. The first is to get a lower interest rate; the second reason is because you cannot afford your current loan. Accepting higher monthly payments will only work for you if you need to refinance for the first reason. Those people having difficulty affording their loan will not be able to capitalize on this option. If you have recently come into a higher amount of income, then you may not have to do much saving in order to increase your monthly payments on a new auto loan. However, if you are at the same income level, then you should consider ways to save money in order to apply it to your auto loan. Some may even consider taking a part-time job to provide the extra boost.

#2 Save for a Large Down Payment

There are two ways to provide a lender additional guarantees on your loan: put down collateral and provide a large down payment. You are already posting collateral in the form of your automobile which will be transferred to your new lender upon completion of the loan modification. This can also count as a down payment since you have equity in the car. However, providing an additional down payment, and a large one at that, will reduce your interest rate and lower your loan limits. Saving for a large down payment may not be possible if you are already having difficulty meeting the financial obligations of your loan. In this case, you should consider generating another income stream. You may also consider settling a portion of the debt as described in the next tip.

#3 Settle the Debt Down

For those who are refinancing to avoid a default, settlement in conjunction with refinancing may be the best option. Your lender will not be willing to settle debt just because you do not want to pay the loan in full. In order for a lender to be willing to consider this option, it is important to show you will not likely pay off the debt at all under the given conditions, resulting in default. If you default, the lender will have a hard time recovering funds from the bad debt. Instead, they would rather settle the debt now for a lump sum payment, even if that payment is lower than the amount they initially expected to earn on the loan. You will end up having a new loan with much lower limits than your original auto loan. Smaller loans typically have lower interest rates because they can be paid off faster, even at relatively small monthly payments. 


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