Refinancing an Auto Loan with Bad Credit

[MrPepperoni]

Hi Community,

Long time no see! I hope everyone started 2024 in a positive and great way.

I have a friend that has a horrible auto loan (~18% APR). It just hurts my feelings that he has such a high rate for a car load and I want to help him refinance it. He is not really financially educated, so he does need help of others to do this and I am willing to help him.

Here is a quick summary - a car loan he has right now is under 2 people (him and his sister). He has a very bad credit (like 590 score), she has good credit (around 750 score but short history).

What are the best ways to refinance it and with what bank/union ?

And how should we go about having 2 people on the loan (keep 2 or maybe better do it all under sisters name) ??

Thank you in advance! 

[Adkins]

If your friends sister has the better score, I would definitely try for a refinance under her credit alone, if she's willing to take the risk. She'd be on the hook for the loan, even though her brother would be giving her the money. I've seen situations like this end  badly though, so it's something she needs to think hard on. If not, then try a local credit union for refinancing first. If no good local ones, PenFed, or NFCU (if qualified). There's a listing of credit unions on the forum that anyone can join, in a thread somewhere. Since he has such a low score, having a positive loan on his credit report would be beneficial for him. 

[MrPepperoni]

Hi again. 

I guess I am trying to understand if refinancing a car loan is a good idea at all. Seems like car loans are not the same as home loans. Meaning original loan even if it is bad (18% in our case) must be paid off in full by a new loan. New loan is just stretching the period longer but adding more interest paid overall. Is my understanding correct? So it's beneficial to reduce monthly payment, but not beneficial because we will pay more $$ in interest overall ?

[pizzadude]

The point of refinancing is to reduce the overall amount of interest that you'd pay for the car loan. 

Run the numbers for your friend, how much additional interest will he be paying if he keeps the 18% loan and pays as scheduled.   This amount would be the number to compare against for any new potential loan.    I'm guessing he'll save money if he can get a lower rate but you'll have to do the math on it to know for certain. 

[MrPepperoni]

okay! thank you for feedback and help!

So the breakdown here is the following:

Nissan Rogue 2016 (market value is ~$11K - so the loan is upside down)
Loan with GrandView Financial (was done through dealership) 

5 year loan at APR 18.98%

Remaining balance as of now: $14,167 (paid $5,654 out of $19,821)

Payments are $514 per month and he is 2 years in this loan at this point.

It is crazy to see that he is 2 years in this loan paying $514 per month (so $12,336 total paid and only $5,654 paid to principal).

I need to save this guy! Really hurts me to see this is even legal to give loans like this to consumers. 

I am looking at 2 options here:

1. Pay off this loan imidiatelly right now to get rid of it completely. Question - will he only pay $14,167 to pay it off (+maybe some associated fees for closing a loan early), is this correct ? I guess I am asking to understand if consumer needs to pay any unpaid interest on the loan in case of paying it off early ?

2. Refinance imidiatelly and better under sisters name alone since her scores are 750+. So in this case we might be able to secure ~6% APR maybe. I am thinking a 3 year loan max if refinance and also since the existing loan is upside down does it mean you need to bring cash to the table to cover that upside down difference (like in our case car is worth $11K and loan is $14K - so they would need to pay off let's say $4K now and take a new loan for around $10k, is my understanding correct ?

Thank you for help! 

[pizzadude]

So if they're upside down on the loan, paying the difference at the time of refinancing would make sense.  In some cases lenders might go higher than 100% LTV but I don't think they should try to roll the balance forward. 

With the current loan at 18.98%, they'll be paying a total of $11,016 in interest, so since they've already paid $6,682 in interest that leaves approx $4,334 remaining interest to be paid.   This is the number you'd like to reduce as low as possible with a refinance.    For example if they refinanced $11K at 6% for 3 years, the total interest paid would be $1,047, so they'd save around $3.3K which is great. 

Their current lender should be able to provide a 14 day payoff or similar, which would give the exact amount required to pay the loan in full.