Nobody makes the perfect financial decision every time. A choice can even seem solid at the outset, then turn bad later. Like, say, taking out an auto loan — even one with a great rate — for a Tesla mere months before the automaker dropped prices.
After the dip, “I was underwater on my loan,” says North Carolina resident Jay Casimir, meaning that he suddenly owed more on his debt than his new electric wheels were worth. “Had I known [it was] coming, I would have either waited to purchase or just leased the car.”
Fortunately, you can recover from a bad loan decision or experience by fine-tuning your budget, reacquainting yourself with your debt and creating a plan, perhaps with some help. Usually, the recovery process starts with letting go of a past you can no longer control.
“They’re sort of beating themselves up because they have dug themselves into a hole,” says Barry Coleman, a vice president at the National Foundation for Credit Counseling (NFCC), of borrowers feeling regret. “They have shame, or they’re angry that they’ve allowed this to happen. We take the approach that bad things can happen to good people. We try to let them know… what it’s done is done. The key is to move forward.”
1. Breathe, then budget
Whether you find yourself struggling to afford a personal loan payment, regretting a student loan or, like Casimir, are suddenly upside-down on a car loan, the first step is to take a breath. Like Coleman says, let go of the decision or bad luck that led to your circumstances. Then, create or update your budget.
Steps to make a monthly budget
- Calculate your post-tax income (and if possible, seek out other income sources).
- Track and categorize your spending, perhaps using a budgeting app.
- Set your budget’s priorities, trimming unnecessary expenses as appropriate.
- Allocate your income to your key expenses, such as debt payments.
- Maintain your budget monthly, updating it as needed.
Look at budgeting as laying the foundation. If you trim your expenses and carve out space for your minimum — or better yet, an extra — loan payment, you’ll set yourself up for success.
2. Get to know your loan, inside and out
The bad loan you borrowed isn’t going away, so it’s wise to fully understand it, warts and all. If you regret taking on high-interest debt, for example, review the most important parts of your loan agreement. Taking this step can help you avoid:
- Late payments
- Nonrequired fees
- Predatory traps
While you’re at it, open and maintain lines of communication with your lender. If you don’t remember your lender, pull your free credit reports via AnnualCreditReport.com.
Share the details of your situation, and your lender may be willing to adjust its terms. Financial institution Discover, for example, offers to temporarily defer or decrease monthly dues for its customers, among other options.
3. Ask for help (once you know where to find it)
Even if your lender offers assistance, you might rightly be concerned about the objectivity of its advice. It’s always wise to seek professional aid from someone who has no stake in your repayment.
For help recovering from a bad loan decision, a certified credit counselor can be a good, low-cost choice. The Department of Justice maintains a list of approved counseling agencies. You can also rely on agencies that are members of the NFCC.
A counselor can “help the consumer assess the situation,” says the NFCC’s Coleman, himself a former counselor. “Reviewing the terms of the current loan… but also identifying why the loan is problematic. Is it because they’re missing payments, because they don’t have enough money to cover all their obligations or have they faced some sort of adversity that has put them in their situation?”
What we find is that the sooner a consumer can address even the slightest hint of financial difficulty, the better. If they see financial stress coming down the road or are just starting to experience it, reaching out for help is an excellent strategy. Oftentimes, people will wait and will come to us as a last resort, once their situation has gotten really dire. We have fewer options to recommend the further down the road they are.
— Barry Coleman, Vice President, National Foundation for Credit Counseling
4. Create a plan — and stick to it
Hopefully, at this point, you’ve made room in your budget for your bad loan payment, or at least found a certified financial professional to help you navigate your debt. What comes next is implementing a debt payoff plan that you can stick to.
Casimir, the Tesla owner, for example, hasn’t been idle.
“I made additional payments on a monthly basis to the principal only to help close the gap,” says Casimir, who works for Sage, a subsidiary of the same company, Red Ventures, that owns Bankrate. “I have also explored selling the car, but I haven’t quite reached the point of equity where it makes sense financially.”
Your plan should be unique to your situation and goals.
- If you want to zero your balance as fast as possible: You might cut back your expenses temporarily and take a kitchen-sink approach to your monthly dues, adopting the debt snowball or avalanche method.
- If you simply want a lower monthly payment (or interest rate): You could consider refinancing, particularly if your credit is in good shape.
If you throw every red cent at your debt but then experience a financial surprise — perhaps your car breaks down, or you’re hit with a stack of medical bills — you won’t have a safety net to fall back on. That’s why it’s key to replenish your rainy day savings as part of your loan repayment strategy. This advice goes for most of us: About 33 percent of Americans have more credit card debt than emergency savings, according to Bankrate’s yearly Emergency Savings Report.
Source: Bankrate Emergency Savings Surveys
Pay down your balance aggressively and once the loan is paid off, apply that same discipline to building up emergency savings or a specific down payment fund. This cushion can limit or eliminate the need to borrow again on unfavorable terms.
— Greg McBride, Bankrate Chief Financial Analyst
5. Consider refinancing
Debt consolidation loans offer something like a do-over. You replace your bad loan with a new one, ideally with a lower interest rate, better-fitting monthly payment and a more approachable lender.
No matter your loan type, consolidation and refinancing could be a solution, particularly if you have stronger credit than before, or a creditworthy cosigner or co-borrower. It helps, too, if you can qualify for a loan that doesn’t include an origination fee (though it’s possible that a no-fee loan with a higher APR could be more costly).
Let’s say you have a bad loan on your ledger and are considering personal loan refinancing.
| Scenario | Potential solution |
|---|---|
| Your credit has improved since you last borrowed | Get a lower-interest personal loan to pay off your existing debt. |
| You can’t afford your monthly payment | Consider a loan with a longer repayment term (at the cost of more overall interest). |
| You can realistically afford a fast repayment | Compare balance transfer credit cards with debt consolidation loans since the former would offer potential interest-free repayment (before the card’s promotional APR expires, typically in 12 to 21 months). |
| Your finances are feeling shaky | Explore ways to consolidate without re-borrowing, including a debt management plan with a credit counselor. |
If your credit has improved meaningfully since the loan was originated, shop around for lower-rate refinancing opportunities. Same if you took your loan out in a hurry because you were in a financial pinch. Rarely are good financial decisions made under duress.
— Greg McBride, Bankrate Chief Financial Analyst
How to avoid another bad loan decision down the road
Once you’re on the road to recovery, you might review the origin story of your bad loan experience. Perhaps you didn’t choose the best bad credit loan company because you faced an urgent situation and didn’t have an emergency fund to fall back on. Or maybe your error was due to a lack of financial education when you were younger, not fully understanding what you were getting into when you signed on the dotted line.
Whatever the cause of your past predicament, work to avoid it happening again. You might establish rainy day savings, for instance, or study up on how installment loans work and how to calculate personal loan payments.
For his part, Casimir shares a second regret of his experience with Tesla financing, even though he originally secured a competitive interest rate. “I may have gotten an even better rate if I had shopped around,” he says.
“If I had to do it over, I think I would have done what most folks do — hit up Google,” Casimir adds. “That would be the first step, then I’d probably reach out to the credit unions (CUs) I currently use, knowing th[at] often times CUs offer very competitive rates.”
In fact, if you’re borrowing a personal loan in the future, checking with federal credit unions is especially wise. They’re required to cap their interest rates at 18 percent, nearly half the 35.99 percent ceiling charged by some banks and online lenders.
Comparison shopping personal loans is key to getting the best possible deal. And while no strategy is completely foolproof, this one can decrease your odds of borrowing a bad loan again.
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