What to Do If You Can No Longer Afford Your Car

Being unable to afford car payments creates significant financial strain. Many face this due to unexpected events like job loss, medical emergencies, or other financial burdens. Understanding available paths is important for navigating these difficulties. This article outlines practical steps to manage your situation, whether aiming to reduce costs to keep your vehicle or exploring options for relinquishing it.

Assessing Your Current Situation

Review your financial standing before exploring solutions. Create a detailed budget of all income and monthly expenses (housing, utilities, food, other debts). This identifies where spending can be reduced and shows disposable income.

Gather precise details about your car loan or lease. Locate your most recent statement to identify the outstanding balance, interest rate, remaining term, and exact monthly payment. Understanding these figures is crucial for evaluating refinancing or negotiating with your lender.

Determine your vehicle’s current market value. Use online resources like Kelley Blue Book or Edmunds, which provide valuation tools based on make, model, year, mileage, and condition. This indicates positive equity (car worth more than you owe) or negative equity (loan balance exceeds car’s market value). This assessment provides data for informed decisions.

Strategies to Reduce Car Costs

To retain your vehicle and reduce financial pressure, consider these strategies to lower monthly expenditures.

Refinancing Your Car Loan

Refinancing involves obtaining a new loan to pay off your existing one, potentially with a lower interest rate or an extended repayment term. Average interest rates in early 2025 were around 6.73% for new car loans and 11.87% for used, though rates vary by credit score. A lower interest rate reduces total loan cost, while a longer term spreads payments, lowering the monthly amount.

Communicating with Your Lender

Communicating with your lender can yield solutions. Many lenders offer hardship programs for borrowers facing financial difficulties. These programs might include payment deferment (temporarily pausing payments) or payment modification (reduced payments for a set period). While interest may continue to accrue during a deferment period, these programs can provide temporary relief and prevent a loan from going into default.

Reducing Car Insurance Premiums

Reduce car insurance premiums to save. Increase your policy’s deductibles; raising a deductible from $200 to $500, for example, could reduce collision and comprehensive coverage costs by 15% to 30%. Evaluate dropping optional coverages on older vehicles and shop around for quotes from multiple providers. Maintaining a good credit record can positively influence insurance rates, as insurers consider credit information.

Lowering Operating Expenses

Lowering operating expenses also contributes to savings. Implement fuel-efficient driving habits, consolidate errands to minimize mileage, or explore carpooling and public transportation alternatives to reduce gas consumption. Regular preventative maintenance helps avoid expensive, unforeseen repairs, preserving reliability and value.

Options for Relinquishing the Vehicle

If keeping the car is no longer viable, several methods exist for relinquishing it.

Selling Your Car

Selling your car, privately or to a dealership, allows you to control the sale. A private sale typically yields a higher price but requires more effort in advertising, showing the car, and handling paperwork. If there is a lien on the title (you still owe money), coordinate with your lender to ensure the lien is released upon sale, often by having the buyer’s funds pay off the loan balance.

Selling to a dealership or trading in offers convenience and a quicker transaction, as dealerships handle titles with liens. However, the offer from a dealership is generally lower than what you might receive in a private sale. If you have negative equity, the dealership may roll the outstanding balance into a new loan if you are trading for another vehicle, which increases the principal of the new loan.

Voluntary Repossession

Voluntary repossession, or voluntary surrender, involves returning the vehicle to the lender when you can no longer afford payments. While this action avoids the stress of an involuntary seizure, it still significantly impacts your credit score. After the lender sells the vehicle, you may still be responsible for a “deficiency balance,” which is the difference between the amount owed on the loan and the sale price, plus any associated fees.

Early Lease Termination

For leased vehicles, early termination often incurs substantial penalties. These penalties can include an early termination fee, the remaining lease payments, and charges for excess mileage or wear and tear. The total cost can amount to thousands of dollars, as the leasing company seeks to recover losses from the premature end of the agreement. Review your lease agreement or contact the leasing company to understand the specific fees and calculations involved.

Understanding the Ramifications of Non-Payment

Failing to make car payments or defaulting on a loan or lease has severe negative consequences.

Impact on Credit Score

Missed payments are reported to credit bureaus, causing a significant decline in your credit score. If repossession occurs (voluntary or involuntary), this derogatory mark remains on your credit report for up to seven years from the first missed payment that led to default. This adverse entry makes it challenging to obtain future loans, credit cards, or housing, often resulting in higher interest rates.

Involuntary Repossession

Involuntary repossession occurs when the lender seizes the vehicle due to non-payment, often without notice. This action happens quickly, resulting in immediate loss of the vehicle. Following repossession, the lender typically sells the vehicle at auction to recoup losses.

Deficiency Balance

Even after the vehicle is sold, you may still owe a “deficiency balance”—the difference between the outstanding loan balance (plus repossession, storage, and sale fees) and the amount the lender received from selling the vehicle. For example, if you owe $15,000 and the car sells for $10,000, you could still be responsible for the $5,000 difference, plus fees. Lenders can pursue collection of this deficiency balance, which might involve third-party debt collectors or legal action.