What to Do If You Can’t Afford Your Car Payment
Can't afford your car payment? Find actionable steps and viable options to manage your auto loan effectively.
Unexpected financial challenges can make meeting obligations, such as car payments, difficult. Job loss, medical emergencies, or other unforeseen circumstances can quickly strain a household budget. Many individuals find themselves in this situation, but options and solutions exist. This article provides steps and information to help address car payment difficulties.
Communicating with Your Lender
Initiating contact with your car loan provider at the earliest sign of financial difficulty is an important first step. Proactive communication can open doors to potential solutions before the situation escalates further. Lenders are often more willing to work with borrowers who communicate early and transparently.
Before reaching out, gather information related to your loan and current financial standing. This includes your loan account number, recent pay stubs, bank statements, and a clear understanding of your current income and expenses. Gathering this information beforehand helps streamline the conversation and demonstrates your readiness to address the issue.
Most lenders offer various contact methods, such as a dedicated hardship department phone line or an online portal for submitting requests. When you connect with your lender, clearly explain your financial situation and why you are struggling to make payments.
Maintain a calm and professional demeanor throughout the discussion. Document all communications, noting the date, time, representative’s name, and discussion summary.
Exploring Payment Solutions
After communicating your financial challenges, your lender may present several payment solutions. One common option is loan deferment, also known as forbearance, which allows you to temporarily pause your monthly car payments. During a deferment period, payments are not required, but interest may continue to accrue and be added to the principal balance, extending the loan term.
Another potential solution is a loan modification, where the original terms of your car loan are altered. This might involve extending the loan term, which can reduce your monthly payment by spreading the remaining balance over a longer period. While a lower monthly payment can provide immediate relief, it often results in paying more interest over the life of the loan. Some modifications may also involve adjusting the interest rate, depending on your financial situation and the lender’s policies.
Refinancing your car loan is another avenue that can lead to lower monthly payments. This involves obtaining a new loan with different terms, potentially from your current lender or a new financial institution. A new loan might offer a lower interest rate, a longer repayment period, or both, thereby decreasing your monthly obligation. Eligibility for refinancing often depends on factors such as your credit score, the vehicle’s current market value, and the amount of equity you have in the car. Lenders will require updated proof of income, a review of your credit history, and details about your current loan and vehicle to assess your eligibility for any of these solutions.
Considering Alternatives for Your Vehicle
If managing car payments remains challenging even after exploring solutions with your lender, considering alternatives for your vehicle may become necessary. Selling the car is one path, which allows you to pay off the outstanding loan balance. Before listing the vehicle, research its market value using reputable online valuation tools, such as Kelley Blue Book or Edmunds, to understand what it is likely worth.
When selling a car with an outstanding loan, the process involves coordinating with your lender to ensure the title is properly transferred upon sale. If the sale price is less than the loan balance, a situation known as negative equity, you will need to pay the difference to the lender to fully satisfy the loan. For example, if you owe $15,000 but sell the car for $12,000, you would need to pay the remaining $3,000.
Voluntary surrender involves returning the vehicle to the lender when you can no longer make payments. While this prevents the car from being repossessed, it does not eliminate your financial obligation. The lender will sell the vehicle, and the proceeds will be applied to your loan balance. If the sale price is less than the amount you owe, you will still be responsible for the remaining “deficiency balance,” in addition to any costs incurred by the lender for repossession and sale. This action is reported to credit bureaus and will appear on your credit report.