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Whether you’ve experienced sudden financial stress due to an emergency such as the coronavirus pandemic or you find yourself struggling with your debt, you might have trouble making your car payment each month. And that makes sense. According to the Quicken, transportation costs, including your car payment and fuel, make up the second-most expensive budget item for the average household. So, what should you do if you can’t afford your car payment?
There are actions you can take, though some have some pretty hefty consequences and you’ll have to decide what works best for your situation. Here are eight common methods people use when they can’t afford their car payments.
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If you’re struggling financially and think you might not be able to pay your car payment, call your lender as soon as possible. Simply state that you’re having some financial difficulties and ask if they have any relief programs.
Some banks are willing to offer temporary forbearance or loan extensions, which means your payments are paused for a month or more without any penalties. Many auto lenders offer a one-time forbearance for a single month for almost any reason as a courtesy to people who have always paid on time, and some have a provision that lets you use this option once a year. Just remember that those payments don’t go away—they get tacked on to the end of your loan and you may end up paying more in interest overall.
If you’re experiencing COVID-19-related financial problems, the federal CARES Act doesn’t include specific relief related to car payments. But the government has encouraged private lenders to work with consumers as much as possible, and many are offering some relief programs related to the pandemic.
If you have strong credit but are experiencing a temporary difficulty paying, you may be able to refinance your loan and lower your payments. You can do so by lengthening the terms on your loan or getting a decreased interest rate. Consider the examples below to see how this might work.
Imagine you bought a car for $20,000 two years ago. You took out a loan for five years at 5.5% interest. Your monthly payments are $382.02 and you owe roughly $12,600 after making two years of payments.
If you refinance at the same interest rate but for a term of five more years, your monthly payment would be $241. The downside is that now you’re on the hook for a car payment for a total of seven years.
If your credit has improved and you can get a lower interest rate, you can save even more. Refinancing $12,600 for four years at 5% interest means a payment of around $290. The same rate for five years makes for a monthly payment of only $238.
Consider trading your car in for one that’s less expensive. Trade-ins are often less than what you could receive from a private-party sale. To get the most from your trade in, appraise your car’s trade-in value, get a dealership quote and then negotiate for a fair price. If your credit has improved, you can also trade the vehicle in for a new car with better loan terms. This tip usually works best if you’re not upside down on your car—which means that it’s worth at least what you owe on it.
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 to officially take over the loan or lease.
Another option is to advertise your vehicle for sale and see if you can 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.
Selling your vehicle is an option if you don’t need access to a vehicle to make it in daily life right now. For example, if you can use public transportation or have a second vehicle to use, this can help you get ahead financially.
Sometimes, walking away from your vehicle is the only available option. This is known as voluntary repossession or voluntary surrender. This should be a last-resort option if you can’t afford your car payment anymore. That’s because it comes with some pretty stiff consequences.
Handing the keys over voluntarily keeps you from being visited by a repo person, which can be embarrassing or stressful. But it doesn’t necessarily mean the lender won’t try to collect money from you. In most states, lenders can attempt to collect the difference between what you owe and what the car sells for after a voluntary repossession. The surrender will also show up as a negative item on your credit report.
How do you return a car you can’t afford? Not to the dealership. Contact your lender and let them know you can’t afford the payments and want to voluntarily surrender. Your lender can let you know what the process is and arrange a time and location where you can hand over the keys and the car.
You can also wait until the bank figures out you’re not going to pay or you become so delinquent that the lender moves to repossess your car. If you do this, the bank might charge repo costs to you and try to collect them, though. Repossession also shows up on your credit report as a negative mark—and it’s a pretty bad one. It can make future lenders wary of working with you because your history indicates you are someone who won’t pay their debts.
Filing for bankruptcy causes an automatic stay. That means creditors cannot continue to seek payment from you or repossess your car while the bankruptcy is in process. Chances are, if you can’t afford your car payments, you might be dealing with other financial issues. Bankruptcy options can offer some help to work through those issues and rebuild your financial life.
However, bankruptcy has serious consequences on your credit and can limit what you’re able to do with your money in the near future. Make sure to talk to a bankruptcy attorney about your options before you make a choice to file.
Whatever you decide, it’s important to stay informed about how the decision impacts your credit. Sign up for the free Credit Report Card so you can keep an eye on your score and five factors that impact it.
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