Car Loan Too Expensive? The One Thing You Should Not Do

When car payments become a burden, understanding the potential consequences and available options is important.

Why Stopping Payments Without Communication is Harmful

Stopping car loan payments without communicating with your lender has severe negative repercussions. Lenders typically offer a grace period, often around 10 to 15 days, before assessing late fees, which commonly range from $25 to $50 or 3% to 5% of the payment amount.

After 30 days past the due date, lenders usually report the missed payment to major credit bureaus. This action significantly damages your credit score, potentially causing a drop of 50 to 100 points or more, and this negative mark can remain on your credit report for up to seven years. A missed payment breaches your loan contract, triggering default clauses. Once in default, the lender can initiate collection activities, including calls and letters. These actions impact your financial standing and can escalate, as the vehicle serves as collateral.

Key Information from Your Loan Agreement

Reviewing your car loan agreement is a necessary step. This document contains crucial information.

Identify your current outstanding principal balance, which is the remaining amount you owe on the vehicle.
Note your interest rate and the Annual Percentage Rate (APR), as these figures determine the total cost of your loan.
The original loan term and the remaining term are also important, as they indicate how many payments are left.
Pay close attention to specific clauses related to late payments, default, and repossession, as these outline the lender’s rights and your obligations.
Find the lender’s contact information, especially for their financial hardship department, as direct communication is often beneficial.

Proactive Measures for Payment Difficulty

When facing difficulty with car payments, several proactive strategies can help. Communicating with your lender is generally the first and most effective step.

Lender Communication and Hardship Programs

Many lenders offer hardship programs, such as payment deferral or extension, allowing you to skip one or two payments by adding them to the end of your loan term. Some may also offer loan modification, which could involve adjusting the interest rate or extending the loan term to lower monthly payments.

Refinancing

Refinancing your loan is another potential solution, particularly if your credit score has improved or interest rates have dropped since you acquired the original loan. Refinancing can lead to a lower interest rate, a reduced monthly payment, or a shorter loan term, depending on your goals. However, extending the loan term to lower payments might result in paying more interest over the life of the loan.

Selling the Vehicle

Selling the vehicle can be an option to pay off the loan, but it requires understanding your car’s market value versus your outstanding loan balance. If you owe more than the car is worth, known as negative equity or being “upside-down,” you would need to pay the difference to the lender. This can be done through a private sale or by trading it in at a dealership, potentially rolling the negative equity into a new loan, though this increases the new loan’s principal.

Voluntary Surrender

Voluntary surrender involves returning the vehicle to the lender, acknowledging your inability to continue payments. While this may prevent the more aggressive process of involuntary repossession, it still negatively impacts your credit score and does not eliminate the debt. You will likely remain liable for any deficiency balance, which is the difference between the sale price of the vehicle and the remaining loan amount, along with associated fees.

What Happens After Missed Payments

If car payments are missed and unaddressed, the lender initiates escalating actions. Initially, you will receive collection attempts through calls and letters.

If payments are not brought current, the lender will issue formal notices of default, indicating their intent to repossess the vehicle. While repossession can legally occur after a single missed payment, most lenders wait until payments are 30 to 90 days past due before taking action.

The repossession process allows the lender to take possession of the vehicle, often without prior notice or a court order, depending on state laws. After repossession, the lender will usually sell the vehicle, commonly through an auction, to recover some of the outstanding debt.

If the sale price is less than the amount you still owe on the loan, you will be responsible for the remaining balance, known as a deficiency judgment. This deficiency can include the loan balance, repossession costs, and sale expenses.

The lender can pursue legal action to collect this deficiency balance, potentially leading to wage garnishment or seizure of other assets if a judgment is obtained. A repossession, whether voluntary or involuntary, is reported to credit bureaus. This harms your credit score, making it difficult to obtain future loans or credit.