How to Get Out of a Car Payment You Can No Longer Afford

It is common for individuals to face unexpected financial challenges that make maintaining their car payments difficult. Job loss, unforeseen medical expenses, or other life changes can quickly turn a manageable auto loan into a significant source of stress. When car payments become unaffordable, understanding the available options is important for navigating the situation effectively. This article explores various approaches to address unaffordable car payments, from assessing your financial standing to considering severe hardship solutions.

Assessing Your Current Situation

Before exploring solutions, gathering comprehensive information about your loan, vehicle, and personal finances is a foundational step. Begin by contacting your lender to obtain the exact payoff amount of your current car loan. This amount can differ from your monthly statement balance due to accrued interest and potential prepayment penalties. Lenders often provide a “10-day payoff” quote, which includes all amounts needed to close the loan within that timeframe. Understanding your current interest rate and the remaining loan term is also important, as these details directly influence your total repayment obligation.

Next, determine the current market value of your vehicle. Online valuation tools can provide estimates for both trade-in and private sale values. Inputting your car’s details will generate an accurate appraisal. Once you have both your loan payoff amount and your vehicle’s market value, you can ascertain your equity position. If the market value exceeds your loan balance, you have positive equity; conversely, if you owe more than the car is worth, you have “negative equity,” often referred to as being “upside down” on your loan.

Finally, assess your personal financial health. Obtain your credit score, which can be checked for free from various sources, to understand how lenders might view you for new financing. Your credit score influences eligibility and interest rates for new loans or refinancing. Additionally, a thorough review of your income and overall budget provides a clear picture of your disposable income and helps determine what payment amount, if any, is truly affordable for you moving forward.

Options Involving Your Vehicle

Addressing an unaffordable car payment often involves making a change related to the vehicle itself. One approach is selling your car, either privately or to a dealership. Selling privately often yields a higher price than a dealership trade-in, but it requires more effort. The loan must be paid off to release the title, which the lender holds as the lienholder, before transferring ownership to the buyer. If you have negative equity, you will need to pay the difference between the sale price and the loan payoff amount to the lender to complete the transaction.

Another common option is trading in your car when purchasing a different vehicle. Dealerships handle the payoff of your existing loan, which simplifies the process. If you have positive equity, the trade-in value is applied towards the new purchase. However, if you have negative equity, the dealership may offer to roll the outstanding balance into the new car loan. While this allows you to exit your current vehicle, it increases the total amount financed for the new car, potentially leading to higher monthly payments and keeping you in a negative equity position on the new loan.

For those with a leased vehicle, transferring the lease to another party can be an alternative to early termination. This process requires the leasing company’s approval, and the new lessee must typically undergo a credit check and meet the leasing company’s eligibility criteria. Fees for lease transfers can range from nominal amounts to several hundred dollars. While a lease transfer avoids significant early termination penalties, the original lessee might remain secondarily liable for payments in certain circumstances, depending on the lease agreement’s terms.

Options Involving Your Loan

When facing difficulties with car payments, exploring modifications to your existing loan agreement or seeking new financing can provide relief. Refinancing your car loan involves securing a new loan to pay off your current one, ideally with more favorable terms. This typically means obtaining a lower interest rate, which reduces the total interest paid over the loan’s life, or extending the loan term to decrease monthly payments. The refinancing process requires applying to various lenders who will assess your creditworthiness and the vehicle’s value.

Before applying for refinancing, it is important to have a good credit score and for your vehicle’s value to exceed your loan balance, as negative equity can make refinancing difficult. Upon approval, your new lender will pay off the old loan, and you will begin making payments under the new terms. While a longer term can lower monthly payments, it might result in paying more interest over the entire loan period.

Alternatively, you can directly negotiate with your current lender. Many lenders offer programs for borrowers experiencing financial hardship, which might include options like a loan modification, payment deferral, or temporary hardship assistance. A loan modification could involve adjusting the loan’s terms, such as extending the repayment period to reduce monthly payments. Payment deferral or forbearance allows you to temporarily pause or reduce payments, though interest usually continues to accrue during this period, potentially extending the loan term. When contacting your lender, clearly explain your financial situation and inquire about available relief programs, being prepared to provide any necessary documentation to support your request.

Addressing Severe Financial Hardship

In situations of severe financial hardship where other options are not feasible, more drastic measures may be considered, each with specific procedural aspects and significant consequences. One such action is voluntary surrender, also known as voluntary repossession, where you return the vehicle to the lender because you can no longer afford the payments. While this proactive step might avoid the immediate costs of an involuntary repossession, it is still reported as a negative event on your credit report and can remain there for several years.

After a voluntary surrender, the lender typically sells the vehicle. If the sale price is less than the outstanding loan balance plus any associated costs, you may still be responsible for a “deficiency balance.” Lenders can pursue collection actions or even lawsuits to recover this remaining amount. It is important to understand that voluntary surrender does not eliminate your debt obligation; rather, it shifts the nature of the debt and has a lasting impact on your credit history.

As a last resort, filing for bankruptcy can address an unaffordable car loan, but it is a comprehensive legal process affecting all debts and carries long-term credit implications. In a Chapter 7 bankruptcy, your car loan may be discharged, but you generally surrender the vehicle unless you reaffirm the debt, agreeing to continue payments. With Chapter 13 bankruptcy, you might be able to keep your vehicle and reorganize the loan payments into a court-approved repayment plan, potentially reducing the loan balance to the car’s fair market value. Bankruptcy filings, whether Chapter 7 or Chapter 13, are significant events that typically remain on your credit report for many years, affecting your ability to obtain credit in the future.