What to Do If You Can’t Afford Your Car Payment Anymore

Facing difficulty with car payments can feel overwhelming. Unexpected financial difficulties can make once-manageable obligations seem impossible. This article provides actionable steps and options to navigate this financial difficulty.

Communicating with Your Lender

Proactively reaching out to your car loan lender is an important first step when anticipating payment difficulty. Initiating communication early demonstrates responsibility and a willingness to find a resolution, which lenders often view favorably. Gather specific information before contacting them for a productive conversation.

Before calling, compile your account number, the original terms of your loan, and a clear understanding of your current financial situation, including the specific reasons for your hardship. This preparation allows you to articulate your circumstances clearly and efficiently. Contacting the lender’s customer service or hardship department by phone is the most effective way to open this dialogue.

During the conversation, explain your situation honestly and express your commitment to finding a solution. Inquire about any programs or assistance they might offer to borrowers experiencing financial distress. This initial call establishes communication and clarifies potential relief options.

Exploring Loan Modification Options

After opening a dialogue with your lender, explore loan modification options for temporary or long-term relief. One common option is a payment deferral, also known as a forbearance or extension, which allows you to postpone one or more monthly payments for a set period, often 1 to 3 months. While payments are paused, interest continues to accrue, meaning the total amount you repay may increase slightly.

Another possibility is a loan modification, which involves changing the original terms of your loan to make payments more manageable. This could include extending the loan term, which reduces your monthly payment by spreading the remaining balance over a longer period. Alternatively, some lenders might temporarily lower your interest rate, leading to a reduced payment for a short duration.

A temporary payment reduction allows lower payments for a specified period, a few months, before resuming your original amount. When discussing any of these options, it is important to ask detailed questions about their impact, such as how they affect the total interest paid, the new payment schedule, and any associated fees. Understanding these details helps ensure you select the most suitable solution for your financial situation.

Considering Vehicle Sale or Trade

If adjusting loan terms doesn’t provide sufficient relief, changing the vehicle offers another path. Selling your vehicle, either privately or to a dealership, can eliminate the car payment entirely. However, it is important to first obtain a payoff quote from your lender to determine the exact amount needed to satisfy the loan.

A significant consideration when selling a financed vehicle is the concept of “negative equity,” which occurs when the outstanding loan balance is more than the car’s current market value. If negative equity exists, you would be responsible for paying the difference to the lender out of pocket at the time of sale. To transfer the title, the loan must be fully satisfied, requiring the seller to provide the remaining balance if the sale price doesn’t cover it.

Alternatively, you could consider trading your current vehicle for a less expensive one, which can result in lower monthly payments. Similar to selling, any negative equity from your current vehicle would be rolled into the financing of the new car, increasing the total amount financed. Dealers often provide estimates for trade-in values, but these can be lower than private sale prices.

Understanding Voluntary Vehicle Surrender

When other options are not viable, voluntary vehicle surrender is a distinct, proactive step. This involves intentionally returning the vehicle to the lender, signaling your inability to continue making payments. Unlike a forced repossession, a voluntary surrender is borrower-initiated and may result in fewer fees or a less severe credit impact.

After surrender, the lender will sell the vehicle, usually through an auction. The proceeds from this sale are then applied to your outstanding loan balance. However, if the sale price is less than the amount you still owe, you will be responsible for the remaining “deficiency balance.” This balance includes the difference between the sale price and the loan amount, along with any costs the lender incurred for repossession, storage, and sale.

Communicate directly with your lender to understand their specific procedures for voluntary surrender and clarify all potential financial responsibilities before deciding. While it avoids the immediate stress of repossession, the borrower remains liable for any deficiency, and the surrender will be noted on your credit report.