You’ve tried and tried, but paying your auto loan is becoming impossible. Perhaps you’re saddled with debt or suffered a major financial setback — either way you’re short on time, and spending more money is out of the question. Credit.com spoke with Matt Jones, a consumer advice editor with Edmunds, a car-buying resource based in Santa Monica, California, to find out what you can do if you can’t make your car payment. You do have some options, including modifying or refinancing your auto loan, and voluntarily surrendering your vehicle. Here’s a quick explainer on auto loans and a breakdown of your options if you’re wondering, “How do I pay my car loan?”
What Is an Auto Loan?
A car loan helps you purchase a new or used vehicle, not unlike a personal loan. You borrow money from a lender, which you repay in set installments over time, and the borrowed amount is called the loan principal, or financed balance. Having good credit is helpful, as this can affect the average interest rate, or what you’ll pay over the life of the loan. According to data from Experian, loan rates for a new car in the first quarter of 2016 was 4.79%, up from 0.08% a year prior. Franchise used rates were 7.81% (down from 8.03% year over year) while independent used rates were 12.22% (down only 0.01% year over year).
Modify Your Auto Loan
Since you work so closely with your lender, “one of the best options if you can’t make your payment and are in fear that you’re going to default is to call them,” Jones said. “Talk to them and see if there’s something they can work out, not forgiveness but forbearance,” the latter of which temporarily lets you hit pause on your payments. “I’ve actually seen banks being willing to do that when people were struggling,” he said. “Talk to whoever’s on the loan and see if there are any options.”
Some lenders will let you make lower payments for a short period of time, or even skip a payment or two and tack the deferred amount onto the end of your loan.This option may be available to someone experiencing temporary financial problems, but it is not wise if your money troubles are ongoing. Still, Jones advised trying to speak with your lender before missing a payment, which can seriously ravage your credit score.
Refinance Your Vehicle Loan
If you have strong credit, you may be able to refinance your loan and lower your payments, either by taking out a longer loan or lowering your interest rate, Jones said. The former can be a costly option but may be better than other alternatives. Your current lender may be willing to refinance your loan, or you may have to shop around for a new one.
“Most people have car loans through Toyota and so on, and they’re not in the business of refinancing,” Jones explained. “They generally give you one term, and that’s that. Often when people refinance, they think calling the same lender and rearranging the terms, and that doesn’t usually happen. It will take involvement of outside lenders, who will look at your car-buying history and payments and pay close attention to the rest of your credit profile.”
If you’re not sure where your credit stands, now’s the time to find out, Jones said. You can view two of your free credit scores, updated every two weeks, on Credit.com.
Trade In Your Car
Many people trade in their car to receive a lower monthly payment, said Jones, although trade-in offers are often less than what you’d receive from a private-party sale, or selling the car on your own. To get the most from your trade-in, you’ll need to appraise your car’s trade-in value, get a dealership quote or a CarMax estimate, as Edmunds recommends on its site, and then negotiate for a fair price.
Let Someone Assume Your Loan
If you have a good car loan with a low-interest rate, or even a good lease, a buyer may be willing to take over your payments. Talk with your lender – not all car loans and leases are assumable. If yours is, the buyer will likely have to meet credit and income qualifications in order to officially take over the loan or lease.
Additionally, policies for car loan assumptions vary by lender and may be considered on a case-by-case basis, senior consumer advice editor Phil Reed said in an interview with Credit.com. If the person assuming the loan doesn’t make their own payments on time, you may be hard-pressed to get your car back, especially if the driver’s put several miles on it, causing wear and tear.
Sell Your Vehicle
Another option is to advertise your vehicle for sale and see if you sell it for enough to pay off your loan. If not, you will have to come up with the difference between what you sell the car for and what you owe in order to transfer the title of the vehicle to the new owner.
Turn the Keys In
Sometimes walking away from your vehicle (known as a “voluntary repossession”) is the only available option. However, keep in mind that in most states the lender can still pursue you for the “deficiency” – the difference between what you owe and what the car sells for at auction, which “can be really bad,” Jones said. If you are thinking of going this route, try to work something out with the lender to minimize balance you’ll still owe.
Let Your Car Be Repossessed
If you fall behind on your loan, your vehicle may be repossessed, which will be “a huge ding on your credit,” Jones warned. Also, repossession is one of the costlier options for dealing with a car that you can’t afford, and the cost of taking the vehicle and selling it may be added to your loan balance, he said. Still, there’s some good news: “Car manufacturers tend to be more willing to work with people than they have in the past,” Jones said. “Banks don’t want the car back, and they don’t want to chase someone down. They’d rather work with somebody to prolong the process so they can get back on their feet — it’s less hassle for a lender.”
Every state has its own laws that cover vehicle repossession. In most cases, your vehicle can’t be “repo’d” if it is locked in your garage, or even if you protest. However, if you are at risk of losing your car in a repossession, it’s a good idea to remove anything of value that belongs to you from the vehicle and to talk with an attorney so you know your rights should it be taken.
File for Bankruptcy
In some cases, bankruptcy can stop your vehicle from being repossessed. Or it may wipe out a deficiency debt you owe on a car that’s already been repossessed or given back to the lender. Either way, it’s a good idea to speak with a bankruptcy attorney to go over your options.
Gerri Detweiler contributed reporting.