Will I qualify for a car loan in Canada if I already have one?
Making timely payments every month is a tedious obligation for adults to fulfill. Especially when we’re talking about car loans, the most common method to purchase new and used cars alike. However, things never quite stay stagnant, it’s likely that after a few years you might be thinking about changing things up, or even just attempting to refinance your auto loan for a better interest rate.
However, there are few options you can take aside from the two as well. When you’re talking about a serious investment like a car, you should also count all your straws beforehand. That said, it essentially boils down to this – your vehicle’s estimated worth. What’s your next move depends on this.
Negative Equity Auto Loan
To begin with, if you have negative equity, or colloquially known as an ‘upside down’ loan, maybe maintaining the status quo is the right thing to do. Negative equity is when your car’s trade-in value is estimated to be worth less than the amount you owe to the lender. This typically occurs when you loan a car with little or zero down-payment.
Therefore, when this happens, you might want to go to a dealership that specializes in structuring these type of deals, and it is logically the prudent move financially speaking. Please ask us if this is your case.
It’s a less conventional method, but it might be a good option if you’re overwhelmed by your loan payments and you’re dealing with negative equity. If you know someone that’s willing to take on your debt, then it’s possible to transfer the amount you owe to that person.
Of course, the process of getting a loan transfer can be somewhat complicated. Your lender needs to accept the new loanee beforehand, and this person typically has to match a few criteria, such as having proper insurance coverage and reputable credit. Some lenders might provide less leeway though, then you might have to resort to the next measure.
Refinancing your auto loan
Refinancing can be a good thing to do when you need a lower interest rate to make ends meet. Over time, just making regular payments for your car loan can help you improve your credit score, and thus you might want to negotiate with your lender about refinancing or loaning terms. Given that you’re reasonable, this is the easiest method for both parties to avoid potential repossession.
Depending on your needs, you can arrange for different terms, such as a longer amortization period, lump sum payment, lower monthly payments or different loan terms. However, do read between the fine lines though, as there’ll be penalties and processing fees to look out for. It’s typically only really worth it if you’re refinancing with a significant interest advantage, as depreciation sets in and your vehicle’s declaration value plummets.
Voluntary Car Repossession
If worse comes to worst, then you might want to consider voluntarily returning your car to the lender. It helps avoid having your car forcibly taken by a collection agency, and it’s your third option if you can’t find a willing creditor or is unable to negotiate a refinancing auto deal.
Consider it the last resort though, as forfeiting your loan will negatively impact your credit score, and leave a bad mark on your record. What happens is your lender will sell the car at an auction, and if the amount procured isn’t sufficient to cover the loan, you will cover the difference. It’s a drastic action, so only do so if circumstances force you to.
Sell/Trade-In your vehicle
If things are looking good for you, you might consider selling or trading-in your car for another one. Trading-in financed cars work in a surprisingly simple way: your trade-in value covers for your loan. Therefore, if you have positive equity, the car trade-in will pay off your loan and serve as a down-payment for your next loan; otherwise, your trade-in value will pay off a portion of your existing loan, and the remaining debt will transfer over to the next car loan.
Do take note that while improved credit score helps contribute to a more competitive interest rate if you trade-in for a lengthier amortization period you might end up paying the same amount or more than what you’re currently dealing with.
Selling is also a valid option if you have a different idea in mind. It’s also a worthy consideration if you have negative equity since it helps to cover a considerable chunk of the debt to help relieve your financial pressure in the long run.
Overall, these are the four options you should consider when you’re thinking about changing things up for your car loan. If you’re still hesitant, do get in touch with us at Garston Motors, as we have our own in-house financial specialists that can provide sound advice for you.