Refinancing an Auto Loan Even with a History of Bankruptcy

Borrowers attempting to refinance an auto loan with a bankruptcy on their record will reach a common problem: lenders will place them in the high risk category. This high risk factor is the reason these borrowers likely got a bad deal on the loan to begin with. Only if their credit and other circumstances have changed will they have an opportunity at a better loan now than they did when they originally took the auto loan.

Why are You Refinancing?

The first thing to think about is the main goal of refinancing. With a bankruptcy already on your record, a refinance could drop your credit score so low you will have trouble even securing a moderate loan in the future. If you are simply refinancing in order to get a better rate, you should think again. In the long run, refinancing this loan could cost you more on future loans. One potential reason a refinance will make sense for someone who already has a low credit score is to avoid default. If your monthly payments are too high to afford, refinancing the loan will be a better option than allowing the loan to go into default.

What is your Budget?

If you do not know your budget, you need to prepare one before you go into negotiations. You should know exactly how much you would like your monthly payments to be. You can have an interest goal in mind, but this will need to come second to monthly payments. Getting a low rate on a loan you cannot afford will not help your situation.

To assure you can afford your loan, determine how much you have to spend on it each month. Start by cutting your monthly salary in half. Subtract other fixed payments, such as debts to other lenders, your rent or mortgage and an average utility bill cost. The remainder is the suggested amount of additional debt you could reasonably take on. If you are willing to truly cut back on your flexible spending, including buying cheaper groceries and avoiding entertainment costs, you may go slightly higher than this number.

What Tools do You Have?

Now that you know your goal, you can start considering how to get there. The power is not in the hands of a bad credit borrower. However, you can still use the terms of the loan in order to get the monthly payment you are looking for.

  • Lengthen the loan - Longer loans offer lower monthly payments; be careful because they also typically come with higher interest rates.
  • Offer additional collateral - Auto loans are secured with your car. However, since your car has been driven and therefore dropped in value, you may need to offer up some additional collateral in order to secure the loan with the lender.
  • Combine incomes - You can apply jointly for the loan with a spouse or partner in order to combine your incomes on the application. This will provide you with a better income to debt ratio overall, helping to secure a loan despite your history of bankruptcy.

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