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If the current economic circumstances have made it challenging for you to keep up with your auto loan payments, you're not alone. The COVID-19 crisis has caused widespread job loss, and others have seen their hours or business revenues get cut significantly.
Fortunately, you have options. In addition to taking advantage of new accommodations lenders are rolling out in response to the outbreak, there are several things you can do on your own to make your car loan less of a burden. Here's what you need to know.
How to Get Help With Your Auto Loan
The Coronavirus Aid, Relief and Economic Security (CARES) Act enacted in late March provides significant relief in many forms, including expanded mortgage loan forbearance options and an automatic suspension of payments on federal student loans.
But because the government doesn't guarantee auto loans like it does many mortgages and student loans, it isn't extending these benefits to auto loan borrowers. If you're looking for relief with your auto loan, here are some options to consider.
Talk to Your Lender
While the federal government doesn't require auto lenders to provide loan forbearance, many of these private companies are offering aid to their borrowers.
In addition to giving breaks on monthly payments, many lenders are waiving late fees, though interest may continue to accrue during the deferral period.
Assistance varies from lender to lender, including how to qualify, how long your payments will be deferred as well as how late fees, interest and credit reporting will work. But if you're experiencing financial difficulties, don't hesitate to reach out to your lender and ask about its deferment policy during the pandemic.
If you go this route, though, it's important to keep in mind that deferred payments will need to be made up later. What's more, if interest continues to accrue during your deferment period, those charges may be rolled into your loan and cause your monthly payment to increase.
If you have a large monthly payment on a relatively expensive vehicle, you may be able to sell the car and purchase a more modest option instead.
If your car is worth more than what you owe on your auto loan, you can either keep the difference for living expenses or use that cash to put money down on the new car and reduce your new monthly payment even more.
Of course, downsizing may not be an option for everyone. The process of selling a car and buying a new one can take a while, which isn't helpful if you need relief now. However, if you expect your financial hardship to last longer than a few months, it may be worth asking your lender for a deferment on payments then look to see if downsizing is a better long-term solution.
If you opt to sell your car in favor of a less expensive vehicle, aim to sell the car to a private buyer instead of trading it in at the dealership. Dealers will always offer less for a trade-in because they're looking to maximize their profit when they resell it.
Look Into Refinancing Your Car Loan
Refinancing a car loan can help you save money on interest and reduce your monthly payments. You can do this either by qualifying for a lower interest rate than what you're currently paying or by extending your loan repayment term beyond the term of the original loan.
For example, let's say you borrowed $20,000 over five years at an interest rate of 4.5%. In this scenario, your monthly payment would be $373. If you were to apply for a refinance loan and get a 3.5% rate while keeping a 60-month term, your payment would drop to $364. But if you were to keep a 4.5% interest rate and extend your repayment period to seven years, your payment would go down to $278.
One of the major drawbacks of refinancing is that it requires an income and a relatively good credit score—or at least one that's improved since you took out the original loan. If you've lost your job or your income has dropped significantly, you may not be able to qualify unless you have a cosigner who meets the lender's credit and income requirements.
Also, even if you do qualify for refinancing, there's no guarantee you'll get the terms you want. To ensure you get the best deal possible, plan to shop around and compare rates and other loan terms from at least three to five lenders.
Don't Forget About Car Insurance
Your auto insurance policy isn't tied to your auto loan, but it could still present an opportunity for saving. Here are some potential ways you can reduce your auto insurance premiums:
- Contact your insurer. Speak to your current insurance agent to see if there are ways to cut back on your monthly rate without sacrificing too much of your coverage. For example, if you no longer have a commute, you may be able to save as your expected annual mileage has dropped.
- Shop around. Regardless of how long it's been since you compared auto insurance rates, it may be a good time to shop around to see if you're leaving money on the table. Search online and request quotes from multiple insurers to make sure you get the best rates available.
- Make changes to your policy. Take a look at your policy to see if you can get rid of unnecessary coverage or increase your deductibles to save money on your monthly rate, making sure you abide by your lender's insurance requirements. And keep in mind that if you cut too much, it could backfire if you end up needing it in the future.
It's hard to say exactly how much you can save on your insurance bill with these efforts, but even a small amount can make a big difference when you're struggling.
Look for Other Ways to Save and Make Money
If you're struggling to make your monthly auto payments, cutting your budget in other ways could help make more room to pay your debts. Look for opportunities to cut unnecessary expenses, including subscriptions and other recurring charges.
Also, look for ways to make money fast, such as getting temporary work, selling unused items and more.