How to arrange a car loan refinance

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There may be a light at the end of the recession tunnel, but millions of Americans still suffer stressed budgets due to job loss or underemployment. Those with unaffordable car payments may be eligible for a car loan refinance.

According to Thomas Webb, chief economist for a unit of Manheim, in Atlanta, 1.9 million vehicles were repossessed in 2009, an increase of 5 percent from 2008. That figure represents the highest number of repossessions since the organization began keeping track in 2001.

“As people continue to default on their auto loans, I think more banks and auto lenders will do more auto refinancing,” says Robert Baker, director of education for Housing and Credit Counseling Inc. in Lawrence, Kan., an agency of the National Foundation for Credit Counseling.

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A win-win situation

Many banks and auto lenders offer people relief on their auto loans by either extending the term of the loan or lowering the interest rate, both of which effectively lower the payment. “It’s really in your best interest to keep your car and in the bank’s best interest to keep people in their cars,” says Mark Edelman, an attorney and partner in charge of McGlinchey Stafford, a law office in Cleveland, that represents banks that finance auto loans.

Baker says refinancing your auto, rather than allowing it to go past due or get repossessed, will help you avoid late fees and a possible negative credit rating. It also saves you from paying on a car you no longer possess.

Refinancing a car loan can be an arduous process. Baker says that while many companies advertise auto loan modifications as a way to give instantaneous relief, there are no shortcuts. He suggests that you try to work with your original lender and be prepared to provide a lot of information.

How it works

When my husband was laid off in 2008 and accepted a new position the next year in our tiny rural region, he took a 50 percent pay cut. That severely impacted our budget.

I called our creditors to see if they could work with us. A representative with the bank that holds our auto loan, which finances many GM vehicles, immediately suggested a loan modification, recognizing that a one-month deferment or other temporary fixes wouldn’t help us keep our vehicle.

A representative in the loss mitigation department required the following information before the bank would approve the refinancing:

  • Signed and completed financial assistance application.
  • Written hardship letter.
  • Two most recent pay stubs.
  • Two most recent bank statements for both checking and savings accounts.
  • W-2 statements for last two years.
  • Federal income tax returns for last two years.
  • Declaration page showing current proof of insurance with bank as lien holder.

The bank offered to lower the interest rate and not report a loss to the credit bureau.

Edelman says our situation was perfect for a loan modification because we had previously been excellent customers, even sometimes prepaying our loan payments, as well as customers who had a very high overall credit score. Additionally, we called before the payments went past due.

“If you call as soon as you see you might have problems, but before the payments go past due, they might be more willing to work out different plans with you,” he says.

Edelman adds that you should try for a car loan refinance even if you’ve had some late payments in the past. “If the bank recognizes a benefit from it and your documentation shows you’re not trying to take advantage, then they still might try to work something out,” he says.

Our original modification representative left the company, forcing us to resend the whole package a second time to a new representative. Four months after we began the auto loan modification process, our car loan refinance was finally approved. On the day we closed on the new loan, the bank also asked us to sign a statement saying we would make that loan payment before any unsecured creditors.

“I think that reflects the fact that many people are keeping their credit cards while letting their homes and cars go back to the bank,” says Baker. “The thing you want to try to do is make arrangements with the banks so you can come out of these times in the best shape possible.”

How to deal with the lender:
  • Ask if the modification will affect your credit bureau report negatively.
  • Make sure you get the name and number of the representative helping you and call at least once a week to check on the status of the application.
  • Provide all requested information on a timely basis.
  • Read the terms of the new loan carefully. Oftentimes, a late payment will nullify the new loan.