Can’t Make Your Car Payments? You’ve Got Options
Having a car provides many conveniences. You do not have to worry about lugging groceries on the bus or waiting 45 minutes for the train. However, for those experiencing financial problems, having to pay a car loan can make owning a car seem more like a burden than a convenience. If you are behind with payments, or worried you will be soon, assessing your financial situation and actively pursuing your options can help you make the best of a difficult situation.
What happens if you stop making car payments?
When you first fall behind, your lender may call you and/or send you letters in an attempt to collect the delinquent amount. If you continue to miss payments, and do not reach an agreement with your lender, the car will likely be repossessed. If reported, the late payments and repossession can damage your credit score and make it harder to get credit in the future. How long the lender will wait before repossessing the car depends on where you live and the specific policies of your lender. Some states allow cars to be repossessed after one missed payment.
Once a car is repossessed, it is usually sold through an auction. It is common for cars to sell at auctions for a fraction of their resale value. If your car sells for less than your loan balance, you will owe the lender the difference, called the “deficiency balance”. The lender may be willing to set up a payment plan with you for the deficiency balance or try to collect the entire balance at once. However, not all lenders aggressively pursue deficiency balances, and in some circumstances lenders may even forgive them. Having the debt forgiven can increase your tax liability, though, since the IRS considers forgiven debt to be a source of income.
Assess why you are struggling.
Are you facing a temporary hardship, or is the car just not affordable? You will be better able to determine an appropriate course of action if you know why you are struggling. If you are not sure if you can afford to keep your car, listing your income and expenses could be helpful. Are you spending more than you are earning? If so, that is probably one of the reasons why you are struggling with your payments. Can you make any changes to your expenses or income to make the payments more affordable, such as getting a part-time job or eating out less? It is also helpful to consider if you can get by without the car. Is there another car you can drive? Are you able to carpool or take public transportation to work? If you absolutely need the car to get to work or run errands, it may make sense to sacrifice whatever you can to be able to keep the car.
What are your options?
Options that provide temporary assistance include loan extensions and repayment plans. In a loan extension the lender takes the payments you missed or are asking to skip and adds them to the end of the loan. This increases your repayment period but eliminates the need to make extra payments to become current on the loan. If you are interested, you should call your lender, but keep in mind that not all lenders offer loan extensions. In a repayment plan the lender collects a partial extra payment on top of your regular monthly payment until you have repaid the full delinquent amount. Of course, you could also make a double payment, but many people do not have the funds to do that. If you are delinquent, avoid sending in a partial payment without talking to your lender first, since it may be rejected without a formal agreement.
Refinancing is an option that may work for people in a variety of situations. For those that fell behind due to temporary hardship, refinancing provides a way to become current without making extra payments. For those whose car payment is too high, refinancing provides a way to lower the payments if they have already paid down a significant portion of the loan, since it can extend the repayment period. For example, if after two years of paying a $20,000, 4 year loan at 7% you refinanced with another 4 year loan at 7% for the remaining balance ($10,697), your monthly payment would decrease from $478.92 to $256.15, a savings of over $200 a month. The same result can be achieved with a loan modification if your current lender is willing to extend your loan and lower your monthly payment. Having a lower payment can help cash-strapped individuals who want to keep their cars, but because you are borrowing money for a longer period of time, refinancing can increase the total interest paid over the life of the loans. Furthermore, if your credit score is low, it may be hard to get a new loan.
If you do not feel that you can afford to keep the car, it is better to sell it than to let it get repossessed. Selling a car is fairly straightforward if you can get at least enough for it to pay off your loan. However, it is not uncommon for people to be “upside down” – owe more on the loan than what they can sell the car for. What do you do in this situation? One option would be to ask the lender to forgive the difference between the amount that is left on the loan and what you sell the car for. Another option would be to set up a repayment plan for the balance remaining on the loan. Since, in most cases, you can sell the car for more than the lender can, you probably would not have to pay back as much as if you let the car get repossessed. If you are planning to get another car, you may be able to roll over the remaining balance into the new car loan. However, this option will only save you money if you purchase a new car that is much cheaper than the one you have now.
If you cannot sell the car at all, you can see if the lender would be willing to accept the car back. This is called a voluntary repossession. Most lenders report voluntary repossessions on credit reports (which will lower your credit score, just like a regular repossession will), so you may only want to consider it if other options have not worked out or if the lender is willing to give you something in exchange for turning in the car, such as a reduction in the amount you need to repay.
When you are experiencing financial problems, it is easy to feel helpless. You may not be able to control everything that happens in your life, but if you are struggling with your car payments, you have options – you do not need to wait until your car is repossessed. Call your lender. Put a “For Sale” ad in the paper. See if you can refinance your loan. Think about what you want to do, then do it!
Revised January 2016.