Buying and paying for a car is a tricky business. After all, you don’t want to cut corners and purchase a car that isn’t reliable, otherwise, you run the risk of spending all your time and money at the mechanic. On the other hand, new cars are expensive and often come with hefty loans.
When you take out a car loan and then hit a bump in your finances, you might have trouble making your payments each month. What should you do when this happens? What if you are upside down on your car loan? You have several options, and some are much better for your wallet and credit than others. Learn about each choice in advance so you can avoid worst-case scenarios with your car payments.
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Reassess Your Auto Loan
The first thing to do when you’re about to fall behind on your car loan is to contact your lender. Honesty is always the best policy and you might be able to work something out. After all, it’s not in their best interest for you to default on the loan because they make more money from your interest payments than anything else. Typically, you have a few different options when trying to change your loan terms.
Modify the Loan
This is a great option if you know that your financial problems are temporary. Maybe you are switching jobs and have a gap in between your old job’s end date and your new job’s start date. Or perhaps you have some one-time medical bills to take care of. Whatever the reason, your best chance of receiving a loan modification is if you have just cause for only missing a few payments. Just make sure you call your lender as early as possible because then you’ll have access to the most options.
Usually, the lender can let you miss a few payments and add them to the final payments of the loan. So if you think your money problems will last the next few years, a loan modification isn’t really a worthwhile solution for you. But it can be helpful in many cases.
A word of caution when researching your loan modification options: be sure to talk directly with your current lender. The FTC warns that some companies claim to be able to modify your loan by charging you an upfront fee, and may even tell you to stop making payments altogether.
This scam can ruin your credit because they more than likely have no bearing on your car loan and just want the cash you pay in advance. Do your due diligence and make sure you’re negotiating with the right people.
Refinance the Loan
Another option you have is to refinance your loan. This can help your monthly payments in one of two ways. The first is by extending the loan term over a longer period, stretching out your loan principal and lowering your payment. The downside to this option is that you’ll end up paying more interest over time. Still, it keeps your credit in tact and prevents your car from being repossessed.
The second way you can refinance your loan is to get a lower interest rate. You’ll need a good credit score, so make sure you try this option before any late payments start to affect your credit.
You can either refinance your car loan with your current lender or a new one. Shop around for different offers to find the best one. You can check with traditional banks and credit unions, as well as online lenders. Just make sure they have a good reputation.
In addition to interest rates and loan terms, also compare any fees that come along with the refinanced loan. You’ll probably be charged a loan origination fee which will be tacked onto your principal balance. It usually ranges between 1-2% of your loan amount, so it can easily cost you an extra several hundred dollars.
Each state also charges a vehicle title transfer fee. The amount varies depending on where you live but it should only cost a few dollars which will also be added to your loan amount. Always remember that when considering your refinance options, you should consider the full cost of the loan to determine whether or not it’s the right choice for you.
Find Someone to Assume the Loan or Lease
Your final option in changing your car loan is to get someone else to assume your loan payments. This tactic may sound strange, but it’s not entirely unheard of. However, it’s actually easier to get someone to take over your lease because it’s not a technical loan.
If you do have a loan, check your contract to see what your options are. You might be able to find a buyer who goes through a separate car loan application process, then effectively pays off your car balance with their new loan. Usually, this happens with a friend or family member. While they’re not technically assuming your loan, they are purchasing your car with their own car loan.
There are also several websites available for people trying to get rid of their car leases. Someone might want to take over your car’s lease payments in order to avoid a down payment on their own lease, or to try a car out for a shorter time period. There are certain strings attached so you’ll need to research each individual site to find out what you’re most comfortable with.
For example, each party will likely have to pay a few hundred dollars in fees. You also might still retain some level of responsibility for the vehicle, even though you’re not the one driving or paying for it anymore.
Get Rid of Your Vehicle
Once you’ve explored your loan options, you might come to the realization that you have no choice but to get rid of your car. Hopefully, you can sell it and not walk away without much of a loss (and maybe even a profit). That’s always the best alternative to having it repossessed; either voluntarily or by force. Let’s dive into this options one at a time.
Sell Your Car
Obviously, selling your car is the best way to get out of your loan. You can hopefully at least break even on the amount you owe your lender, if not make a few bucks. However, many vehicle owners are surprised at how difficult this can actually be. Cars typically lose up to 11% of their value just when you drive it off the lot, and as much as 20% by the end of the first year. And that amount continues to depreciate, even as you pay on your loan for the full amount.
You might find yourself stuck in the unfortunate position that you owe more than your car is actually worth. But in order to transfer the title to another person, you’re required to pay off your car loan in full.
So how can you come up with the money? If your credit is decent, you might be able to get a personal loan through a credit union or online lender. You use the funds from that loan to pay off the remainder of your car loan. Yes, you’ll still be paying money on a car you don’t own, but it will be much less expensive, especially if you’re having trouble coming up with your current payment.
If you still need a car, try to borrow enough to buy a cheap used car that will get you where you need to go. You’ll still have transportation and hopefully will be paying just a fraction of your former loan payments.
A voluntary repossession is when you turn in the keys to your car on your own, rather than having a forced repossession. This is really a worst-case scenario because even a voluntary repossession comes with a number of repercussions both financially and on your credit. That’s because you’re still held responsible for whatever amount is still owed on the car after the trade-in value is subtracted from your loan balance.
Depending on how much you owe, it could still be thousands of dollars. If this is your only option left, you can try to negotiate the amount owed with your lender. The lender could also turn over your account to a collection agency, which will be added to your credit report along with the repossession. Each of these items can take years to recover from.
Repossession rules vary by state, but typically the lender has the right to repossess your vehicle once your loan payments go into default. Just like a voluntary repossession, you’ll still be held accountable for the deficiency balance after the car is sold off. Repossessions stays on your credit report for seven years after the delinquency date, so it’s best to avoid this at all costs.
Your best solution is always to talk to your lender as early as possible! The repossession process is timely and costly on the lender’s end, so they often will try to find a repayment plan that works for you.