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Wondering how you're going to pay that stack of bills on the table? You're not alone. Nearly 1 in 3 Americans are having trouble covering their household expenses, according to the Center on Budget and Policy Priorities. If your auto loan is among those expenses—and you can't afford your car payment this month—here are five steps to consider.
Contact Your Lender
Your first stop: your auto lender. Call and explain that you're at risk of 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 under control. And the sooner you get in touch, the more options your lender may be able to offer.
Here are two things you can try right away.
- Request a change in due date. Just got a new job, and can't make your next payment because your payday changed? Ask your lender to adjust the due date of your next payment. Even if payday is only delayed by a week, it's worth calling and asking to avoid the late fees.
- Alter your payment schedule. To keep you from defaulting, your lender may be willing to create a payment plan that suits your needs. For example, it could extend your loan term so your monthly payments are lower, break your payments into smaller biweekly chunks or let you pay off missed payments over time.
Heads-up that these options might come with fees, and could cause you to accrue more interest than you otherwise would. Ask your lender about these potential ramifications, and get updates in writing to avoid future confusion.
In fact, whenever you contact your lender, the Consumer Financial Protection Bureau recommends jotting down the name of the representative, as well as their ID number and any case numbers affiliated with your request.
Request a Deferral
If you're experiencing financial hardship and a minor adjustment isn't going to suffice, you can also ask your lender about deferring your car 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 when it comes to deferring payments. Some allow you to defer your entire payment; others require you to keep paying interest. Some limit the number of times you can request a deferral; others forbid deferrals entirely if you're already behind on your bills.
Each lender also has different application requirements. If deferrals are built into your loan agreement, you might 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 need the deferral, along with financial details like your income and credit scores.
If your deferral request is approved, it could give you some much-needed breathing room for the next month or three—allowing 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 onto the end of your loan. That's why some lenders call this process a "loan extension."
Though that means you'll end up paying interest on your loan for longer (an additional three months if you defer three payments), it's much better than losing your car to repossession.
Refinance Your Car Loan
Do you have strong credit scores? And do you owe less on the car than it's worth? Then you might want to look into refinancing your car loan.
This essentially involves replacing your current loan with a new one, usually from a different lender. Once you've signed the paperwork, your new lender will pay off your existing loan and take over the car's title until you've finished paying it off.
By refinancing, you may be able to reduce your interest rate or monthly payment. If you're struggling to pay your bills, you should 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 example, you could refinance with a 36-month loan. While that will likely increase the amount of interest you'll pay in the long run, it will also reduce your monthly payments today. And, though refinancing could cause a small dip in your credit scores, it's far superior to the damage that would be caused by missing a payment or defaulting on the loan.
Refinancing may be difficult if you have low credit scores, or if you owe more on the car than it's worth. Some lenders may also charge a penalty for paying off your loan early. Still, refinancing might be worth a shot if the alternative is getting your car repossessed.
Just make sure you apply for auto loan refinancing with a reputable company: The Federal Trade Commission reports that some fraudsters have been conducting scams wherein they promise to reduce your monthly bill if you pay an upfront fee.
Trade In or Sell Your Vehicle
If you're struggling to make your car payment, ask yourself if this is a one-time occurrence—the result of an unexpected medical bill, for example—or if this is something that could happen again.
If it's the latter, your safest bet might be to get rid of the vehicle. You could either trade it in for something more affordable, or sell it and buy a used vehicle so you can avoid having a car payment altogether. (Older cars often qualify for cheaper insurance too.)
Before going this route, however, you'll need to ask yourself two questions: How much is your car worth? And how much do you still owe on it?
If your car is worth more than you owe, you have "equity"—and could sell it to get yourself out of debt. Since private buyers generally pay the most, you could give yourself time to find one by asking your lender for a deferral, as outlined above.
Or, if you're in a rush and looking for an easy way out, consider working with a dealership or a site like Carvana or Carmax. When you don't have the title in hand, this is often the most painless route.
When you have equity, selling your car is one of the best solutions because 1) you could walk away with a few thousand dollars that allows you to purchase another, more affordable vehicle, and 2) you'll pay off the loan on time, meaning you won't incur any damage to your credit scores.
Unfortunately, if you're "upside down" on your loan, meaning you owe more than the car is worth, this option won't work as well. One potential strategy: selling the car for the highest price you can get, then taking out a personal loan to pay off the remaining principal. While you'll still need to pay back the personal loan, the payments will likely be more manageable than what they were with your auto loan.
Voluntarily Surrender It
On the verge of having your car repossessed? As a last-ditch option, you can consider giving it back to your lender.
While voluntary surrender will still have a serious negative impact on your credit scores, it'll probably be less embarrassing and expensive than an involuntary repossession. Since you are taking initiative and responsibility for your debt, future lenders may also view a voluntary surrender slightly more favorably than an involuntary one.
That said, a voluntary surrender will remain a black mark on your credit reports for seven years—and, as with an involuntary repossession, you'll still be responsible for paying the deficiency balance: what you owed, minus what the lender received for your car at auction, plus any additional fees. If you can't pay this balance, your debt will likely go to collections.
Instant Action to Take Now if You Can't Afford Your Car Payment
All the strategies above have merit depending on your circumstances. But take these three steps first, as soon as you know you're not going to make your payment:
- Call your lender. Don't wait. As soon as you realize you're in danger of missing a payment, get your lender on the phone. Ask what type of relief programs, loan extensions or payment plans it can offer, getting any promises in writing before hanging up.
- Run the numbers. To understand your options, including refinancing your loan or selling your car, you'll need to get a handle on certain numbers. Ask your auto lender how much you owe on the car, visit kbb.com to learn how much the car is worth and check your credit scores using our free tool.
- Consider the whole financial picture. Even if you're able to get a deferral or refinanced loan, you should ask yourself the hard questions. Is this car truly within your budget? Or is this stressful situation happening more often than you'd like to admit? Depending on your answers, selling your car may be the smartest option.
Whatever you do, don't ignore that pile of bills. Missing a car payment—just one!—could result in fees, damage to your credit scores and even repossession. So start taking action today; the earlier you do, the better off you'll be.
Note: If you're struggling because of COVID-19, see if you're eligible for any relief programs. Even if you can't get pandemic assistance for your auto loan, you may be able to get help with other bills, freeing up money to make your car payment on time.