ADVERTISEMENT

Can you really afford that car loan?

What seems like a reasonable interest rate now might not later

By Todd Ossenfort

The Credit Guy
'The Credit Guy,' columnist Todd Ossenfort
The Credit Guy, Todd Ossenfort, is a credit expert and answers readers' questions about credit, counseling and debt issues.

Ask a question

'The Credit Guy' archives

Question for the CreditCards.com expert

Dear Credit Guy,
I bought a car for $15,000 and my interest rate runs me 18 percent. I didn't think it was that bad because I am a first-time buyer. I am wondering what is the best way to drop that interest rate FAST? -- Trey

Answer for the CreditCards.com expert

Dear Trey,
I noticed from your e-mail address that you are with the U.S. Army. Thank you for your service! Depending on your circumstances, you may qualify for protections under the Servicemembers Civil Relief Act (SCRA). Under this revised law, service members are entitled to a reduction on the interest rates charged for loans that were initiated before the service member began active duty in the military.

So, if you were called to active duty from a reserve unit and you acquired the car loan before you were called up, your loan would qualify under the Act for interest rate reduction. The SCRA requires lenders to reduce the interest rates for loans to a maximum of 6 percent while the service member is on active duty. You would need to send the creditor written notice that you are on active duty and include copies of your orders. You only qualify for the interest reduction while serving on active duty. Once your status changes, you will need to notify the creditor.

If the above doesn't apply, then please read on. I am curious as to why you want the interest rate to drop "FAST." I hope you are not in a crisis situation, and that you didn't knowingly enter into a loan with a monthly payment that you cannot afford. Is it that your financial situation has changed since you initiated the loan and you can no longer afford the payment? Maybe you just don't want to pay that much in interest charges, which would be prudent on your part. Depending on your situation, your options may be somewhat limited.

Unfortunately, with auto loans it is very easy to get upside down (owe more than the car is worth) very quickly -- particularly with a high interest rate on the loan and a minimal down payment. When upside down in a loan it is difficult to refinance the loan to lower your interest rate because you need to borrow more than the collateral (the car) is worth.

Additionally, selling the car is difficult for the same reason. However, selling the car for a loss and then paying the lender the difference in the sales price and the loan balance is better than a voluntary repossession. When a car is repossessed it is sold at auction for only a fraction of its value and the former owner, which in this case would be you, is responsible for paying the difference in the auction price and the loan balance, which can be quite high.

Now that you have the bad news, the good news is if you made a decent down payment on the car loan and your credit history has improved since you purchased the car, you may qualify for a loan with a more reasonable interest rate. I would recommend starting with your local military credit union where you will likely get the best rates and terms. If you can demonstrate a consistent payment history of 6 to 12 months this should help get you a lower interest rate than the current 18 percent you are being charged. Shopping online for a loan is another option that you could pursue to secure a lower interest rate loan.

As of September 2008, the current going rate for a used-car loan for someone with good credit is around 7 percent. Going from an 18 percent loan to a 7 percent loan would save you a huge amount over the life of the loan. You didn't mention the length of the loan you have, so let's take a look at the differences for three-year, four-year and five-year loans:

Monthly savings from a lower interest rate on a $15,000 car loan
  3-year loan 4-year loan 5-year loan
Monthly payment at 18% $542 $441 $381
Monthly payment at 7% $463 $359 $297
Monthly savings $79 $82 $84
Total interest savings, life of loan $2,849 $3,909 $7,572

You might also try trading in the car at a dealership for another vehicle. Many dealerships will accept your trade for the loan balance even though it is not worth that much. If you go this route, make sure you can afford the new vehicle and accompanying loan!

Take care of your credit!

See related: Law eases debt burden for active military

Meet CreditCards.com's reader Q&A experts

Does a personal finance problem have you worried? Monday through Saturday, CreditCards.com's Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.

Published: September 8, 2008


Join the discussion
We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, do not disclose confidential or personal information such as bank account numbers or social security numbers. Anything you post may be disclosed, published, transmitted or reused.

If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.

The editorial content on CreditCards.com is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company's business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.




Follow Us


Updated: 09-30-2016


Weekly newsletter
Get the latest news, advice, articles and tips delivered to your inbox. It's FREE.


ADVERTISEMENT