Wondering how you're going to pay that stack of bills on the table? You're not alone. Nearly One in three Americans are experiencing trouble covering their household expenses, according to the Focus on Budget and Policy Priorities. If your car loan is among those expenses—and you can not afford your car payment this month—listed here are five steps to consider.
Contact Your Lender
Your first stop: your auto lender. Call and explain that you're vulnerable to falling behind on your loan. Since vehicle repossession is usually the most time- and resource-intensive route when payments are missed, many lenders are willing to work with borrowers to get their payments in check. And the sooner you receive in contact, the greater options your lender might be able to offer.
Here are two stuff you can try immediately.
- Request a general change in due date. Just got a new job, and can't make your next payment since your payday changed? Ask your lender to adjust the due date of the next payment. Even if payday is just delayed by a week, it's worth calling and asking to avoid the late fees.
- Alter your payment schedule. To help keep you from defaulting, your lender might be willing to create a repayment plan that meets your requirements. For instance, it could extend your loan term so that your monthly obligations are lower, break your instalments into smaller biweekly chunks or let you repay missed payments over time.
Heads-up these options might come with fees, and may cause you to accrue more interest than you otherwise would. Ask your lender about these potential ramifications, and obtain updates on paper to prevent future confusion.
In fact, if you speak to your lender, the Consumer Financial Protection Bureau recommends writing down the name of the representative, as well as their ID number and then any case numbers affiliated with your request.
Request a Deferral
If you're experiencing financial hardship along with a minor adjustment isn't going to suffice, you should consider asking your lender about deferring your vehicle payment. If approved, this will allow you to skip a small number of payments without penalties or fees.
Every auto lender has different rules and requirements with regards to deferring payments. Some allow you to defer your entire payment; others need you to keep paying interest. Some limit the number of times you can request a deferral; others forbid deferrals entirely if you are already behind in your bills.
Each lender also has different application requirements. If deferrals are built to your loan agreement, you may begin to see the option to skip a payment from within your online account. In other cases, you might have to submit a hardship letter that explains why you require the deferral, together with financial details like your income and credit scores.
If your deferral request qualifies, it might provide you with some much-needed breathing room for the next month or three—enabling you time to, say, find a job and start receiving paychecks.
But that doesn't mean you're off the hook forever: Your lender will simply tack those deferred payments to the end of your loan. That's why some lenders refer to this as process a “loan extension.”
Though that means you'll wind up paying interest on your loan for longer (an additional three months should you defer three payments), it's a lot better than losing your car to repossession.
Refinance Your Car Loan
Do you've strong credit scores? And would you owe less on the car than it's worth? You very well may wish to look into refinancing your vehicle loan.
This essentially involves replacing your present loan with a brand new one, usually from a different lender. Once you've signed the paperwork, your new lender pays off your existing loan and dominate the car's title until you've finished repaying it.
By refinancing, you may be in a position to reduce your rate of interest or payment per month. If you are struggling to repay what you owe, you need to prioritize the latter—and look for refinancing that allows you to extend your loan's term.
If you have 24 months left on your auto loan, for instance, you could refinance with a 36-month loan. That can be a will probably boost the interest you'll pay in the long run, it will likewise lower your monthly obligations today. And, though refinancing might cause a small dip in your credit scores, it is superior to the damage that might be caused by missing a payment or defaulting on the loan.
Refinancing may be difficult for those who have low credit ratings, or you owe more on the car than it's worth. Some lenders could also charge a problem for paying off the loan early. Still, refinancing might be worth a go if the alternative is getting your car repossessed.
Just be sure you apply for auto loan refinancing having a reputable company: The government Trade Commission reports that some fraudsters have been conducting scams wherein they promise to reduce your payment if you pay an upfront fee.
Trade In or Sell Your Vehicle
If you're struggling to make your car payment, consider if this is a one-time occurrence—the result of surprise medical bill, for example—or maybe this really is something which might happen again.
If it is the latter, your safest bet might be to get rid of the vehicle. You can either trade it set for some thing affordable, or sell it and buy a used vehicle so that you can avoid having a car payment altogether. (Older cars often be eligible for a cheaper insurance too.)
Before going this route, however, you'll need to ask yourself two questions: How much is your car worth? And just how much would you still owe onto it?
If your vehicle may be worth a lot more than you owe, you have “equity”—and may sell it to get yourself out of debt. Since private buyers generally spend the money for most, you could give yourself time to locate one by asking your lender for a deferral, as outlined above.
Or, if you're in a hurry and looking for an smart way out, consider using a dealership or perhaps a site like Carvana or Carmax. Whenever you not have the title at hand, this could be probably the most painless route.
When you have equity, selling your car is among the best solutions because 1) you can leave with some thousand dollars that permits you to purchase another, less expensive vehicle, and 2) you'll pay off the loan on time, meaning you will not incur any damage to your credit scores.
Unfortunately, if you're “upside down” in your loan, meaning your debt a lot more than the vehicle may be worth, this option will not work too. One potential strategy: selling the car for the highest price you will get, then getting a personal loan to repay the rest of the principal. While you'll still have to pay back the personal loan, the instalments will likely be more manageable than these were together with your car loan.
Voluntarily Surrender It
On the verge of having your car repossessed? Like a last-ditch option, you can consider passing on to your lender.
While voluntary surrender will still have a significant negative effect on your credit scores, it'll apt to be less embarrassing and expensive than an involuntary repossession. As you are taking initiative and responsibility for the debt, future lenders may also notice a voluntary surrender slightly more favorably than an involuntary one.
That said, a voluntary surrender will stay a black mark in your credit history for seven years—and, as with an involuntary repossession, you'll still result in paying the deficiency balance: what you owed, minus what the lender received for your car at auction, plus any additional fees. If you cannot pay this balance, your debt will likely go to collections.
Instant Thing to do Now if You cannot Afford Your Car Payment
All the strategies above have merit based on your needs. But take these three steps first, once you know you aren't going to make your payment:
- Call your lender. Don't wait. Once you realize you are in danger of missing a payment, get the lender on the phone. Ask which kind of relief programs, loan extensions or payment plans it can offer, getting any promises on paper before hanging up.
- Run the numbers. To understand your options, including refinancing the loan or selling your vehicle, you'll need to get a handle on certain numbers. Ask your auto lender how much your debt around the car, visit kbb.com to understand just how much the vehicle may be worth and check your credit ratings using our free tool.
- Consider the entire financial picture. If you are able to get a deferral or refinanced loan, you should ask yourself hard questions. Is that this car truly within your budget? Or perhaps is this stressful situation happening more frequently than you'd like to admit? Depending on your responses, selling your car may be the smartest option.
Whatever you need to do, don't ignore that pile of bills. Missing an automobile payment—just one!—could result in fees, harm to your credit ratings and even repossession. So start taking action today; the earlier you do, the better off you will be.
Note: If you are struggling due to COVID-19, see if you're entitled to any relief programs. Even though you can't get pandemic assistance for the auto loan, you might be able to get assist with other bills, freeing up money to create your car payment on time.