Working your way back to a good or even excellent credit score takes hard work, dedication, and time. Unfortunately, many people can't afford to wait for an excellent score before making essential purchases. After all, how can you rebuild your credit score if you don't have reliable transportation to get to work every day?
However, taking out an auto loan with poor credit can often mean an unfavorable rate or long term, costing you more money over the long run. While this might be the lesser of two evils at the time, paying your loan on time for months or years will gradually improve your credit score and put you in a better financial position. As your credit improves, should you still stick with your old loan?
How Poor Loan Terms Affect Your Finances
A high rate coupled with an extended loan term means paying more for your car over the life of your loan. While an extra year or two may not seem like much at the time, it can potentially add thousands to the total cost of your vehicle. If you're trying to rebuild your credit and get your financial life back in order, this high cost can prevent you from paying down other debts.
Even worse, a high monthly payment can leave you struggling to pay other bills or take care of necessary monthly expenses. A missed payment can mean setting back your progress substantially by leaving a black mark on your credit report. These setbacks can hurt when you're working so hard to get your credit score back to an acceptable range.
How Refinancing Can Help
Making all of your monthly payments on time can rebuild your credit score at a surprisingly quick pace. You may find your credit improving drastically after a year or two of payments on your car loan, potentially putting you into a position to receive a much better rate on a car loan. Unfortunately, you'll still be stuck with the terms of your original loan.
While you could trade your car in and take out a loan on a new vehicle, this approach means taking on even more debt. Instead, refinancing allows you to utilize your better credit score without increasing the size of your loan. If your current loan doesn't have any early prepayment penalties, a lower rate or shorter term can reduce the total amount you owe.
By refinancing to more favorable loan terms, you can put yourself into a stronger financial position to continue rebuilding your credit score. This strategy allows you to enjoy the benefits of your improving credit even as you keep working towards a brighter financial future.
For more information, contact a company like Together Credit Union.Share