January 5th, 2010
Dear Credit Karma – All About Auto Loans
Dear Credit Karma,
I was recently divorced and my ex-husband has an auto loan and my name is still on the debt, how do I go about that debt NOT affecting my credit score anymore?
The only way to remove yourself as a co-signer on this loan is for your husband to refinance the car under his name alone. This new loan will replace the old loan and you will no longer be liable as a co-signer. But in the meantime, any actions– including default or missed payments– taken on the account by you or your ex-husband will damage both of your credit scores. The debt will remain on your credit report as long as you are a co-signer, so have him refinance the loan as soon as possible to protect your credit score.
Dear Credit Karma,
My husband and I share a car – I really need to get my own, but we filed for bankruptcy a year and a half ago. I have poor credit because of that (and struggle with making payments on time). How likely am I to get an auto loan?
While bankruptcy is a tough financial pitfall to recover from, take heart: it won’t haunt your credit forever, and you can get an auto loan, but at a steep cost. If you are set on buying a car now, you will likely resort to a subprime or high risk lender, who cater to borrowers with poor credit, who will likely approve your loan. The real question is not “how likely are you to get an auto loan?”, but “can afford the exorbitantly high interest rate those types of lenders typically charge?”. Check out difference in payments between a poor credit and good credit borrower for a $25,000 loan on a 48-month payment plan:
|
Credit Score
|
Interest Rate
|
Monthly Payment
|
|
|
Poor Credit Borrower
|
620-659
|
13.2%
|
$673.17
|
|
Good Credit Borrower
|
720-850
|
5.7%
|
$583.69
|
*interest rates from Five Cent Nickel
That’s a difference of about $89 a month, which adds up to $4,295 difference in payments over the life of the loan. To see what kind of interest rate you’ll be offered and if you can afford it, look up your credit score and compare it to Five Cent Nickel’s auto loan interest rates.
The lesson here is that while you might need the car right now, the extra cost in interest rates over time may be reason enough to hold off on purchasing a car until you have better credit. Tacking an extra car loan payment may worsen your credit and overwhelm you with debt, especially if you are already struggling to make payments on time. Consider alternatives like carpooling, public transportation, or a system of sharing the car with your husband. In the meantime, take the next few months to improve your credit score with healthy credit habits like making on-time payments, using a secured card, and using the money you would have used on a new car to pay off existing debts. Within a year or so, you will have a higher credit score and be able to receive better financing options from lenders.
Submit a question now, and maybe Credit Karma will answer your question on our next Q & A blog post!
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Here’s another idea. Forget about debt. If you’ve already been through bankruptcy, why take on more debt again? Instead, save $300-500 per month in a savings account until you have enough to buy a good used car for cash. Forget new cars, and forget loans. Stay ahead of what you buy, and don’t put yourself in a position of owing others.
If I finance my current car with another bank, the balance will turn out to be greater than my current balance. The monthly payment will be lower but I’ll owe more. This doesn’t seem like a savings to me. Why? What do you suggest.
When you refinance your car, you may be negotiating for a lower monthly payment, but that will result in a longer loan term. A lower balance over a longer period of time, plus whatever the interest rate, will result on the total new loan costing more than remaining balance and remaining time period on your current auto loan. What you should do depends on your financial priority–do you want to pay off the loan sooner and thus pay less overall; or do you want to refinance and pay less monthly yet pay more over the life of the loan. First figure out if you need affordable monthly payments now or if your goal is to owe less on the auto loan. From there, you can decide if refinancing to another bank is the right choice for your situation.