Ouch. That loan rate is very high. I feel your pain. That is the sort of rate they give to people with bad credit. New credit maybe. But for someone with a solid 1 year of history, the rate does seem to me to be a bit high unless you have something negative like missing payments. But you didn't tell us much about your credit history or your credit score. The dealer who financed you should have given you the score they used to justify giving you that rate and the credit report agency they used to get that score. The rate may be fair for your history or it may not be.
You should search online for a Car Loan calculator and look at how much interest you'll pay each year for that life of that loan. That first two or three years will look painful and you'll think of all the other things you could have spent that money on. That might have kept you from ever taking a 7 year loan with a high rate like that. Next time, don't do it. Find a cheaper car if a loan >5 years is needed to afford the payments. Also, if you are unlucky the new car may start to need repairs like the last one before the loan is paid off. If it happens before the last two years or so, you'll likely still be underwater on the loan (vs the car's value) which will make it harder to afford buying another vehicle as you'll have to roll over the negative equity onto the new loan, increasing the payments which will likely make you take another 7 year loan so the process may repeat and get worse each time till you can't afford a loan at all. And yes, in 2 years, you will feel like you have barely paid down the principle on the loan. If I had your loan, I would do the following:
- Find out what is bad on your credit reports and do whatever I can to repair the damage so I can qualify for a refi at a much lower rate in a year or so. If you have a clean report and it truely is just due to your credit being too new, then try to refi again in 6 to 12 months after making sure to make all payments on time so you don't add any negatives to your credit reports. There is no reason to stick with that loan for more than 1 year unless your credit is trashed. When you do try to refi, try joining a local credit union as they often have good auto loan rates and some are more likely to approve people without perfect credit and still give them a good rate (check the reviews first as not all credit unions are equal).
- Cut back expenses such as eating out and pay extra every month so you get the loan paid off as quickly as possible. Even 5 years of interest at your current rate will be expensive.
I would wait for 6 months while trying to pay down the balance (make larger payments then required) and try to refi at that point, assuming your credit is relatively clean. I certainly wouldn't wait more than 1 year. You didn't mention whether or not the car is new or not. If the car was new, you lose a lot of value on it as soon as you drive it off the lot. With a used car (if the price was fair and you weren't ripped off), you lose less when you drive off so the damage isn't as great. Though sometimes new cars have large incentives that give you cash back that can help make up for this.
The problem with long term loans like your 7 year loan is you are mostly paying interest for the first 2 years, so yes, it does make it harder to refi which is why I recommend paying it down faster if you can afford it. Just cutting back on eating out (if you do) can make a difference in how much you can afford to pay. In some ways, long term loans like that are almost designed to trap you into your current loan. I hear enough horror stories from my relatives and friends who did the 7 year route to convince me it isn't for me. I personally never take anything over a 5 year loan, and only then if the interest rate is very low, otherwise I prefer 3 to 4 year loans even if it means buying a cheaper or older car.
If you haven't already, you should request your free annual credit reports from the 3 main agencies and see if you have any hidden negatives you don't know about (annualcreditreport.com). Someimtes, ID theft does happen.
From what you say, it doesn't sound like your credit is bad. One of the reasons I recommend waiting 6 months (if you keep making your payemnts on time) is having a good credit mix (both an installment loan like an auto loan and credit cards) will improve your credit score and show better history than just having credit cards. So having some good history on your auto loan will enhance your chances at a new loan. Many auto loan lenders use an Auto Loan enhanced score that gives more weight to previous auto loan history. If nothing else, your credit profile will be older which will help with your original problem.
If you don't want to wait, you really should talk to some of the credit unions in your area (that you meet their requirements to join) about how they might be able to help you. Talking doesn't require you to do anything. If it seems like they can help, you can then join (usually just requires a small deposit into a savings account). Some credit unions are known for giving good loans to people who couldn't get get one at a larger bank. But not all credit unions are the same. And they all have their own requirements for joining so not everyone can.
