What Happens If I Can’t Pay My Car Payment?

Unexpected challenges can make it difficult to meet financial obligations, including car payments. If you cannot afford your vehicle, understanding your options and taking timely action can help. This information provides guidance for individuals experiencing payment difficulties. Addressing the issue early can significantly influence outcomes.

Understanding Your Loan Agreement

Before taking any action, thoroughly review your car loan agreement. This document contains details that define your obligations and the lender’s rights. Familiarize yourself with your lender’s contact information, loan number, and current balance.

Locate the original loan amount, interest rate, and payment due date. Pay close attention to grace periods and late fees. Many agreements include a grace period, typically 10 to 15 days, allowing payment without penalties. Once this period expires, late fees, often $25 to $50, may be applied.

The agreement outlines consequences of a missed payment, including conditions that constitute a default and the lender’s rights regarding repossession. Knowing these terms helps identify the correct entity to contact for resolution.

Proactive Communication with Your Lender

After understanding your loan terms, communicate with your lender. Prepare for this conversation by having your loan number and identification ready, along with a concise explanation of your financial hardship. Clearly articulate the circumstances that have made it difficult to maintain payments.

Lenders often have programs or solutions for borrowers facing temporary financial difficulties. One common option is payment deferral or forbearance, which allows you to temporarily pause monthly payments. During a deferment, your due date is extended, and interest typically continues to accrue. While this provides immediate relief, the deferred payments are added to the end of your loan term.

Another solution is a loan modification, changing the original terms of your auto loan to make payments more manageable. This could include extending the loan term to reduce the monthly payment, lowering the interest rate, or adjusting the payment due date. Lenders may consider modifications if you demonstrate verifiable financial hardship, such as job loss or unexpected medical expenses. Document all communications with your lender, including names, dates, and a summary of any agreements.

Exploring Other Avenues for Resolution

If direct modifications or deferrals with your current lender do not provide a viable solution, other options involve the vehicle itself. One approach is to sell the vehicle to pay off the outstanding loan balance. Determine the car’s current market value using reputable online resources, such as Kelley Blue Book or Edmunds.

Understand if your car is “underwater,” meaning you owe more on the loan than the vehicle is currently worth. If you have negative equity, you will need to pay the difference between the sale price and the loan payoff amount. When selling, contact your lender for an exact payoff amount, which may differ from your remaining balance due to accrued interest or fees. The title, held by the lender, will only be released upon full payment, requiring coordination to transfer ownership.

Another alternative is voluntary surrender, where you willingly return the vehicle to the lender. This process involves informing your lender of your inability to make payments and arranging a time and place to return the car and its keys. Before surrendering, remove all personal belongings from the vehicle. While a voluntary surrender can help avoid the stress and potential costs of an involuntary repossession, you remain responsible for any deficiency balance.

Understanding Potential Outcomes of Non-Payment

If car payment issues are not resolved, the lender may initiate an involuntary repossession. This often occurs after a borrower has missed multiple payments, though some loan agreements permit repossession after just one. Lenders typically wait until an account is 30 to 90 days past due before repossessing the vehicle. After repossession, the vehicle is sold at auction to recover the outstanding debt.

Both missed payments and repossession negatively impact your credit score. Payment history is a primary factor in credit scoring, and a single payment reported 30 days late can cause a drop. A repossession is recorded as a derogatory mark and can lower your score by 100 points or more. This negative information remains on your credit report for up to seven years from the date of the first missed payment that led to the repossession.

Even after repossession and sale, you may still owe the lender a deficiency balance. A deficiency occurs when the vehicle sells for less at auction than the remaining loan balance, plus repossession and sale costs. The lender can then pursue a deficiency judgment, a court order obligating you to pay the remaining amount. If granted, this judgment gives the lender legal avenues to collect the debt, including wage garnishment, liens on other property, or levying bank accounts. Lenders must sell the repossessed vehicle in a “commercially reasonable” manner; if they fail to do so, it could affect their ability to collect the full deficiency.