What to Do If You Can’t Make Your Car Payment?

Difficulty making car payments can be a source of stress. Many individuals face this situation due to unexpected financial hardships. Understanding your options and proactively engaging with your loan obligations is important. This article provides guidance for those unable to meet their car loan commitments.

Review Your Loan Documents

Understanding your car loan agreement is a primary step when facing payment difficulties. Locate your original loan contract, which details your obligations and the lender’s rights. This document specifies the lender’s contact information for future communication.

Examine key financial terms within the agreement, including your interest rate, remaining balance, original loan term, and remaining term. Identify specific clauses related to late payments. Look for details on grace periods, which range from 10 to 15 days, allowing payment without late fees.

The contract also outlines the definition of default, which can be triggered after a missed payment. Note repossession clauses, which detail the lender’s right to seize the vehicle if you fail to meet the loan terms. An acceleration clause allows the lender to demand immediate repayment of the entire outstanding loan balance under certain conditions, such as missed payments. Check for sections describing options for loan modifications, payment deferrals, or hardship programs.

Communicate with Your Lender

After reviewing your loan documents, communicate with your lender. Contact them as soon as you anticipate or experience difficulty making a payment, ideally before missing one, to discuss your situation. Lenders often have departments for customers facing financial hardship; contact them by phone or online. When you communicate, have your account number and personal details available, and be prepared to explain your reason for difficulty.

Inquire about solutions to manage your payments. Loan modification is one option, where the lender may adjust the terms of your existing loan by lowering the interest rate, extending the loan term, reducing your monthly payment. Another possibility is a payment deferral or forbearance, which allows a temporary pause or reduction in payments for a specified period, one to three months. Interest usually continues to accrue during a deferral, and skipped payments are often added to the end of the loan term.

Briefly explore refinancing options, which involve taking out a new loan to pay off the current one, potentially with a lower interest rate or a longer term. When discussing any arrangement, be honest about your financial situation and your ability to meet future payments. Take notes during all conversations, including the date, time, and the name of the representative. If an agreement is reached, ensure you receive all new terms and conditions in writing.

Explore Alternative Solutions

If direct communication with your lender does not yield a workable solution, several alternative options exist. One consideration is selling the vehicle privately. This approach can yield a higher sale price than a trade-in, which could be beneficial if you have negative equity, meaning you owe more on the loan than the car is currently worth. Selling a car with negative equity requires you to pay the difference between the sale price and your outstanding loan balance to the lender.

Another option is voluntary surrender, where you return the vehicle to the lender. This action prevents repossession, but it does not eliminate your financial obligation. You will likely still be responsible for any deficiency balance after the lender sells the vehicle. Consulting with a professional credit counseling service can provide guidance on managing debt and exploring options. These organizations offer budgeting assistance and help understand your financial landscape.

Bankruptcy is a last resort that can impact your financial future. While it may discharge car loan debt, it does not automatically allow you to keep the vehicle, as the loan is secured by the car itself. If you wish to retain the vehicle, you may need to enter into a reaffirmation agreement, committing to continue payments. This option has substantial credit implications and should be discussed with a legal professional to understand its consequences.

Understand the Outcomes of Default

Failing to make car payments and not reaching a resolution with your lender can lead to severe financial consequences. Repossession is an outcome, where the lender takes possession of the vehicle. Repossession can occur after a missed payment, often after 30 to 90 days past due. Lenders are not required to provide advance notice of repossession, and they cannot commit a “breach of the peace” during the process, such as using physical force or breaking into a locked garage.

Once repossessed, the vehicle is sold, often at auction, and these sales yield prices lower than the vehicle’s market value. If the sale proceeds do not cover the outstanding loan balance, along with repossession, storage, and auction fees, the borrower is responsible for the remaining amount, known as a deficiency balance. For example, if you owe $12,000 and the car sells for $3,500 with $150 in fees, the deficiency balance would be $8,650.

Non-payment and repossession have a negative impact on your credit score. Late payments are reported to credit bureaus once they are 30 days past due, which can lower your score. A repossession remains on your credit report for up to seven years, affecting your ability to secure future credit, including other loans or housing. Lenders may also pursue legal action to collect the deficiency balance, resulting in a lawsuit, wage garnishment, or liens on other property.