If you are in a situation where you are unable to make car loan payments on time or default on the car loan, the first thing you should do is: do not panic. If you are looking for car loan help because your payments are too high there are options for you.
Getting back on track – some alternative solutions would likely still be available to you. Whatever you do, but do not voluntarily surrender your car to the lender. This will not prevent the loan default from reflecting on your credit report. A creditor may still sue you for deficiency after selling off your vehicle.
Here are some tips and options to consider when you cannot pay your car loan. Make sure to select the best option as per your unique situation which is least damaging to your credit score.
Assess Your Financial Situation
You need to determine if you are struggling through a temporary hardship or you cannot afford your car entirely.
You will be in a better position to take a decision when you know the reasons behind your financial struggles and why you find it difficult to keep up with payments. Identify whether making changes to your income and expenses is an option.
Sell the Car
The first thing you should do is find out your equity value in the car. Compare the car’s worth to the amount you owe on the loan. You have equity if you owe less than what your car is worth. It is called negative equity or ‘upside down’ when you owe more than what your car is worth.
This is about the same situation as Dumb and Dumber put themselves in – you don’t want to be in that situation.
The easiest way to get out from under a car loan is to sell it directly to a dealership. You do not have to bother about hurting your credit because there will be no missed car payments. You might even be left with some surplus cash to buy another set of wheels – something with more manageable car payments.
You might get more money by selling it directly to a private party because you are essentially cutting out the middlemen. However, this can be tricky when you do not have the car’s title in your hand. You can take up a personal loan to cover the difference if you do not have enough equity in the vehicle.
Look to Refinance your Loan
If you have equity, you may be able to refinance your current loan as well. However, you need to make sure that you find a loan with a lower interest rate, or one that allows you to reduce your repayment through refinancing. This can be done through a longer loan term which can provide less pressure through lower repayments although you will be paying your loan off for a longer period.
This can be difficult in the current market situation. However, you also have the option of stretching out the loan term. You will definitely end up paying more in the end because of added interest, but, the monthly payments will become more manageable.
This should be the course of action when your goal is to keep your car at all costs. Your current lender might give you the option of a loan refinance. However, it makes more sense to look into your personal bank or credit unions. These institutions generally offer lower interest rates as compared to other lenders.
You certainly don’t want to go into business with Walter White from Breaking Bad – look what he did to his own family!
Trade the Car
Many dealerships give the option of trading the current car for a less expensive one with a fresh loan. This will substantially lower your monthly payments and the dealer may even roll over the excess you owe on the current loan into the new car loan.
However, you need to be careful with this approach because you will essentially be ‘upside down’ on your new car loan. You need to make sure that the new car (for which you trade in the old car) is relatively affordable.
Trade the Lease
If your car is on lease, then you can look at peer-to-peer lease exchange sites. Any shopper, who likes the car and lease terms, will take the car as well as the loan out of your hands.
This will again protect your credit score. However, the shopper should qualify and the bank should allow it. You do not have to worry about future payments if you can unload the loan this way.
Speak to the Lender
If nothing works out, then speaking to your lender and being upfront might be the only option left. Communication is a vital factor and is the key difference between having your car repossessed. With lease options they may be willing to allow you to hand back the vehicle and walk away, depending on a few factors.
You should call the lender right away if you cannot keep up with payments and have exhausted all your options.
Most financial institutions have trained customer service teams that are ready to understand your situation and work with you. Your lender will be more flexible if some major life event like a layoff at work, death in the family, or serious illness is preventing you from keeping up with payments.
Some lenders will allow forbearance which is a set time period wherein you can miss or make reduced payments till your situation gets better. Not too many banks will rearrange your loan terms to make it easier for you to repay.
Understand that banks or financial institutions will use repossession only when they have exhausted all other options.
What to Do if your Car Is Repossessed?
All is not lost even if your car gets repossessed. A lender might allow reinstating or redeeming your repossession by allowing you to get your car back.
The window is usually short for this option – 2 weeks. Getting your car back will not be cheap either. Most lenders will expect a payment that brings your loan current or at least close to the current amount.
The lender will sell the car at an auction if you fail to reinstate your repossession. However, you may still be financially obligated if there is a deficiency. For instance, if you owe $10,000 on the loan (which is nowhere near the amount the bankrupt and mismanaged city of NY owes but this is another topic) and the car sells for only $8,000, then you still owe $2,000 and all other charges such as repossession fee.
Few lenders might write off the balance. However, the majority do not because they are within their rights to sue you. If they win the lawsuit, then they can collect the money by garnishing your wages or accessing your bank account.
The Bottom Line
The first step while dealing with a car loan default should be to evaluate out your finances. You need a clear picture of your financial situation to determine the best course of action.
To begin with, the ideal approach is to buy a car within your financial means. Factor in the extra costs of ownership while purchasing a car, even if it is not exactly the car of your dreams. Always leave a little room in your budget to cover for emergencies which none of the cartels in Narcos seem to do but that is on them!