Reduce Your Car Loan Monthly Payments by Refinancing

Your monthly car payment is usually one of the biggest financial obligations that you have every month. Besides your mortgage payment, most of the time, the car payment is the second largest payment each month. One way that you could potentially address this is by refinancing. Here are the basics of refinancing an auto loan to lower the payment.

How it Could Help

Refinancing an auto loan could potentially lower your payment in a few different ways. When you initially take out an auto loan, the term is usually for around 5 years. Each and every month, part of your payment goes towards the principal and the interest on the loan. When this happens month after month, the balance that you owe on the loan will go down.

Although your balance is going down, the loan is still amortized on the original loan amount. Therefore, your monthly payment is set up based on the old loan balance. If you were to wait a few years and then refinance the loan, you could amortize the loan on the new loan balance. For example, instead of paying your monthly payment based on a $15,000 loan amount, you can pay your payment based on a $7,500 loan amount. This would increase the time that it takes to pay off your loan, but it would result in a lower monthly payment.

Another thing that could potentially help is if you can locate a lower interest rate for the loan. For example, depending on what rate you were able to secure for your initial loan, you may be able to get a lower rate in the market later. Therefore, instead of paying 5% on a car loan, you could find a loan for 4%. Even if you have not paid down your balance much, this will have the effect of lowering your monthly payment.

How to Refinance

In order to refinance your car loan, you will first have to locate a lender that you can work with. You need to shop around through multiple outlets in order to find the best rate. You need to check with banks, credit unions, and online auto lenders. There are a plethora of options available and checking them all out will ensure that you get the best rate available in the market.

Once you locate a lender that you can work with, you need to apply for the new loan. Filling out the application will be pretty simple. You will provide them with the basic information that they require, such as your name, address, and social security number.

The lender will then pull your credit report and decide whether you are worthy of a new loan. If you are approved, they will give you the money that you need to pay off the old loan. You will pay it off and then start making payments to the new lender.

Why Are Suprime Car Loan Interest Rates So High?

Getting a subprime car loan could be an option for you if you have been turned down by a traditional car lender. Subprime car loans provide loans to those that have less-than-perfect credit at a higher interest rate. Here are the basics of why subprime car loans have a higher interest rate than other loans.

Subprime Car Loans

In order to fully understand why subprime car loans have such high interest rates, you first need to understand what these types of loans are. A subprime loan means that the lender is dealing in the riskiest part of the market and makes the loans separate from traditional loans. Those with a 640 FICO score or lower will be potential clients for this market.

Increased Risk

The lenders are going to charge more for the interest rate on these types of loans because of the increased risk. When you are dealing with people that have a credit score of less than 660, this means that you are taking on a great risk. Those with low credit scores got those scores because of their disregard to paying their debts. Regardless of what happened to cause them to not pay their bills on time, the fact remains that they are a bigger credit risk than those with higher credit scores.

Lending money to someone for a car loan is an investment for the lender. They do it so that they can make a return on their investment. One of the first rules of investment is that when you take on higher risk, you should be able to get a higher reward. Therefore, when the lender works with someone that falls into a high risk category, they are going to be asking for a higher return on their investment.

Lack of Options

Another reason that these lenders charge so much is because they know that they can and still have plenty of business. There are quite a few people that fall into the category of not having a good credit history. These people can not get a normal car loan and therefore, they have to deal in the subprime market. When the lenders know this, they can charge a higher rate of interest and still have a steady stream of applicants that have been turned down elsewhere. Almost everyone needs a car these days and therefore, they will be willing to take any interest rate that they can get in many cases.

Risk of Default

Another factor that goes into the high interest rate is the risk of default. Many borrowers that fit into the subprime market have a high debt-to-income ratio. This combined with a bad credit score means that they are a high risk of default. As a subprime lender writes loans, they know that there is a certain amount of loans that will go into default. With this information, they have to charge the group as a whole enough money in interest so that they can still make money even with the defaults.

The Truth behind Car Loan Elimination Scams

There are a number of car loan elimination companies out there that claim that they can get you out of your car loan. While this would be great for you, many times, it is a scam. Here are a few things to consider about car loan elimination scams.

How They Work

Car loan elimination scams are very common. The companies that offer this service usually mass market in order to find people to work with. They will send out mass emails or send flyers out in the mail. They will use a lot of hype and slick advertising to get people to contact them about eliminating their car loan.

When you are very deep in debt, you want to believe that there are some options out there that can help you eliminate your debt. Therefore, this sounds like a pretty great proposal. You hire someone to help you get out of your car loan debt. It is cheaper than paying off the loan, so to you, it makes sense. The only problem is, the process is completely bogus.

You call the company or visit their website and they start to tell you about the process. For a fee that usually amounts to $1000 to $3000, they will show you how to get your car loan eliminated. Most of the time, they will not be handling this process for you. They will only show you how to do it and then let you handle everything. They may provide you with a generic letter that you can show to your creditors. It may say something like "Declaration of Voidance" or "Bond for Discharge of Debt." You are supposed to be able to show your car loan company this document and then they are supposed to just forgive the debt. However, the bad thing is that these documents do not actually work. You pay them the fee, take the documents, and then do what they suggest. As it turns out, the creditor will usually have no idea what you are talking about and ask you to leave.

Principles Behind Argument

When you start to learn about the methods that they tell you to employ, it sounds great. They tell you things like all debt is technically illegal. They tell you that there are court cases that are starting to rule in favor of the debtors as a result of this glitch in the system. They want you to believe that once you sign the loan document, the lender is paid in full. Therefore, they are not out any money when you use this process.

Caution

When approached with an offer like this, you should exercise extreme caution in moving forward. There are a few ways that you can legitimately get rid of debt. You can make your payments and pay it off, you can do a debt settlement, or you can file for bankruptcy. If someone is promising otherwise, you might want to ask for proof before you part with a few thousand dollars.