Not being able to make your monthly car payment is never a good thing. With economic uncertainty, you may be faced with no alternative. Here are 10 questions to ask that offer insight on what to do if you can’t make your car payment.
- What is my car worth?
- Can I change my payments?
- What are the advantages/disadvantages of payment deferral?
- Can I refinance the balance?
- Should I sell or trade-in my car?
- Can someone assume my loan or lease?
- Should I return my car or have it repossessed?
- Is seeking bankruptcy protection a good idea?
- Should I keep my car insurance?
- How do I repair my credit rating?
Not all the answers will fit your individual needs. However, by following this advice you can minimize the risk to your finances if you miss a car payment. Of course, you can avoid all this by buying a car that’s within your means. But if you do find yourself behind, here’s what you can do.
What is my car worth?
Determining the value of your car will go a long way in figuring out your next steps. That equity can be a valuable tool in negotiating with your lender on repayment terms. It can also figure into the decision on whether to keep the car, sell it to another party or trade it in on another vehicle. The problem is that often those in financial difficulty may discover they paid too much for their car or bought a model that just doesn’t hold its value. If you owe more than the loan balance, then you are “upside-down” in the loan or lease.
You might also be one of the lucky few that bought a new vehicle below market value or one in high demand. In that case, you may owe less than what its worth on the market. If that’s the case, you’re in a much stronger position to rework your loan with favorable terms.
Can I change my payments?
Say you can’t make that next payment. The first thing is to contact your lender to see if other terms can be negotiated. This may be payment deferrals or lengthening the loan term to drop the monthly payments. Some banks have programs specifically designed to help those who struggle with loan repayment.
That help may take the form of allowing you to skip one payment, especially if you haven’t missed any before. However, that amount will be tacked on the end of your loan, and interest will continue to accrue during the grace period. Financial institutions are unlikely to offer this break more than once a year.
What are the advantages/disadvantages of payment deferral?
During the COVID-19 dislocations, the credit arms of the major manufacturers and some financial institutions are offering payment deferrals of three to six months, as well as some payment forgiveness. However, many of these programs are aimed at buyers or recent purchasers of new vehicles. As the economy recovers, these offers are expiring. Check your lender to see if they are offering COVID-19 deferrals.
To be able to participate, applicants have to send a hardship letter indicating a job loss or some other reason why they can’t make their payments. Usually, the bank will run a credit check and if deferral is approved, there will be a forbearance agreement that must be signed outlining the terms and repayment schedule. It will also include any charges or fees associated with the new terms.
Payment deferral buys time to get your finances in order. However, deferred payments are tacked on to the end of your loan. Interest accrues during the extra time the loan is active, for which you will be responsible, as well as during the deferral grace period. You end up paying more interest on the loan. By the time payments end, the car may not be worth as much as it would have under the original loan.
Can I refinance the balance?
You can negotiate with your lender or other financial institutions to refinance the loan balance. If interest rates have gone down, there may be some monthly payment savings. By extending the repayment period, you’ll also see a decrease in your monthlies.
You do have to requalify with a credit check and if your rating has deteriorated, you run the risk of paying a higher interest rate. It still may be to your benefit to explore this option since you will be refinancing the balance rather than the whole cost of the vehicle, which will result in lower payments.
Should I sell or trade-in my car?
This might be an attractive alternative, especially if you’ve discovered that your vehicle has a high resale value. Remember that you will be liable for the difference between the loan balance and what you’re able to get for your car. The best return on a used vehicle sale is to a private party, but that involves effort on your part to advertise, show, negotiate, and close the deal. A direct sale to a dealer is easier, but will also return a lower price.
Trading in your car on a less costly new or used vehicle is another option. The dealer will also be able to roll the money you owe on your trade into the new deal. This adds cost to your new ride, however, if you extend the loan far enough out, you may end up having a lower monthly payment. But in the end, you’ll be paying far more for the car because of this added cost and the extra interest. The benefit is that you’ll still be in a car with a payment that more closely matches your ability to pay.
Can someone assume my loan or lease payment?
If you have a late model car with low mileage and attractive interest rate, you might find someone to take over your payments. However, check the fine print on your sales agreement to see if there is a provision allowing someone else to take over the payments.
Leases also may or may not be assumable. Again, this feature should be spelled out in the lease contract. In this case, third party companies like Swapalease charge a fee to find someone to take over your lease payments.
Should I return my car or have it repossessed?
Both choices are far from optimal. A voluntary surrender or voluntary repossession is when the owner walks away from the vehicle. This doesn’t absolve you from your loan or lease, the financial institution will still try to collect their money. And that balance is the difference between what’s owed and what they can get for your car, usually on the wholesale market or at auction. In the case of a lease, you may be responsible for not only the remaining monthly payments but also a hefty early termination charge.
A more desperate gambit is not paying until the lender figures out they’re not getting their money back. In that case, repossessors are called into action to collect your vehicle at a time and place, not of your choosing. In addition to being liable for the loan balance, you may also be dunned for repossession charges.
In either case, you will be doing severe damage to your credit rating. You’ll find getting a loan extremely difficult. Even if you do fix your credit to the point of qualifying for a loan, you’ll likely pay a much higher interest rate as a credit risk.
Is seeking bankruptcy protection a good idea?
Not making a car payment is a sure sign of financial difficulty and you may want to look into filing for bankruptcy. This approach will buy time since you’ll be able to keep your car during the bankruptcy process.
However, you should view bankruptcy as a last resort. It will damage your credit rating and the court may restrict how and where you can spend your money. It’s best to get legal advice before going this route.
Should I keep my car insurance?
Insurance can be costly, but if you’re considering not making a monthly car payment, you owe it to yourself to keep your policy current. Even if you default on payments, you’re still liable for the vehicle whether it’s totaled in an accident or stolen.
Letting coverage lapse is a costly mistake. In addition to being out the value of your car if anything happens to it, not having insurance will make it more difficult to get and much more expensive the next time you apply.
How do I repair my credit rating?
Once you’ve weathered the financial storm, one of the first tasks you should tackle is repairing any damage done to your credit rating. First off, don’t miss any more car payments. You should also keep up payments on other loans and figure out a way to keep your debt in check.
Also, no matter how many offers come at you, don’t take on any new credit cards or accounts that you don’t need. You should regularly check your credit score and update any information, especially your income, that could help raise your rating.
This story originally ran on Autotrader.com.