What to Do If You Can’t Afford Your Car Payment

Gas, insurance, and routine maintenance aren’t the only car expenses that can catch you off guard. Registration fees, toll roads, and parking payments can all contribute to a financial sum higher than expected.

In addition, unexpected costs, such as accidents, speeding tickets, or windshield replacements, also lurk until what seems to be exactly the wrong moment. Then, of course, there are car loans and their varying interest rates.

It’s common not to account for emergencies or unexpected costs for your vehicle, especially in such a turbulent economy. If you find yourself behind on car payments, it’s important to take action.

Here’s what you can do if you can’t pay your car loan.

What Happens When I Miss a Car Payment?

Every time you miss a payment, your credit score will take a negative hit. Missing one car payment won’t wreck your credit, but missing multiple payments is a recipe for trouble. More serious consequences await if you stop paying your car loan altogether.

You also risk getting your car repossessed if you don’t resume your payments. Lenders can take back a vehicle as soon as you are in default of your loan, which is typically 90 days without a payment. Laws differ by state, but if you miss three consecutive car payments, expect to wake up one day and discover that your car has vanished. (However, you are entitled to retrieve any personal possessions you left in the vehicle.)

What hurts even more is that you could still owe money on the car after you lose possession. You can expect your lender to turn your loan over to collections, and you can expect calls and letters asking you to pay off your loan or negotiate payment terms.

These repercussions can haunt your credit rating for years, making it hard to borrow money again and increasing the interest rate on any loan you do get.

Can’t Afford Car Payments? Consider These Options

If you find yourself in a financial bind and risk missing one or more car payments, the best course is to be professional and communicate with everyone financially tied to the vehicle, from your lender to your spouse to any co-signers on the car loan.

Communication is key, but you also have other options. You can refinance your car loan or trade or sell the car to pay off the loan and get into a less expensive vehicle. If you own a home, you can pull out equity to pay for the car.

You also have the option of surrendering the vehicle. That could save you money (and some points on your credit score).

Before you decide, consult a qualified financial advisor to talk about your situation and compare ideas. You may have more positive options than you realize.

1. Talk to Your Lender

While the penalties for missed loan payments are unquestionably troubling, the good news is that your lender doesn’t want the situation to deteriorate any more than you do. The process of collecting overdue debts costs lenders money, and they’re unlikely to recoup what your car is worth through repossession.

If you’re worried that you can’t make a payment, contact your lender before you get behind. Tell them you’re struggling and ask if they have a relief program available. Some financial institutions will pause payments for a short time without penalty, especially if you always pay on time. When you make the call, be prepared to suggest a payment amount you can afford.

2. Refinance the Loan

Maybe a reason you’re struggling to pay your car loan is its high interest rate. You should consider refinancing. By lowering the interest rate or lengthening the term of the loan, you can lower your monthly payment.

To get a lower interest rate, your credit score will need to be better than when you got the existing loan, so paying on time is important.

Extending the terms of the loan can improve your immediate cash flow problem, but this tactic comes at a cost. By paying on the loan for a longer time, you’ll pay more for the car. Consider that extra cost to be the price for not having your car repossessed.

Also, don’t just talk to your existing lender about refinancing. Shop around at local lending institutions and compare rates.

You could also investigate getting out of a car loan. That usually means trading or selling your vehicle. It also might mean voluntarily surrendering the car.

3. Sell, Trade or Try Transit

Here is an unexpected question to ask yourself: Do I really need a car? To be more specific: do I really need this car at this time in my life?

If you live in a city with good local transit, you can save a lot of money by using the bus, subway or train. Not only will you save on car payments, but you’ll also save on gas, insurance, maintenance, and upkeep. Another good option is to carpool on your daily commute. If you’re in a family with more than one car, consider whether you need all of them.

Selling Your Vehicle

Selling is financially wiser than trading in your vehicle to pay off your car loan — often 15% to 25% better, according to Kelley Blue Book. Consider this example from Kelley’s online site: A black 2017 Toyota Camry with 30,000 miles in good condition had a trade-in value of $14,443, but a private sale value of $16,494 — a difference of more than $2,000.

It requires time and patience to market the car through online or classified ads. It could take a month or longer to find a buyer willing to pay your asking price, but this method pays off if maximizing the money is your motivation.

Another possibility is finding a buyer who will take over your payments. However, this only works if the loan is assumable and the buyer meets the lender’s financial qualifications.

Trade in Your Vehicle

Trading in your car for a less expensive one could solve your problem. You’ll need to study to know what your car is worth and how to negotiate for a fair price. One advantage to this is that it can happen more quickly than in a private sale, and when the transaction is complete, you still have wheels. Ideally, you’re not underwater on your car loan, meaning your car is worth at least what you owe on it. Contact your lender and ask.

Even if you are upside down on your car loan (you owe more than the car is worth), you may trade it in, but whatever you owe that the trade-in doesn’t cover will be rolled into your new auto loan, so do the math. Exchanging one loan you can’t afford for another is not helpful.

Assuming you have been making your payments on time, your credit may have improved enough so that a lower rate makes the replacement car affordable.

4. Use Home Equity

If you own a home, you may have money you aren’t thinking about — home equity. Lenders offer home equity loans in which you pledge your home as collateral and take on a second mortgage. You can typically borrow up to 80% of your home’s equity. If you have $50,000 of equity, you qualify to borrow up to $40,000.

The advantages are that home equity loans consolidate your debt into a single monthly payment, and the interest you pay on such loans is tax-deductible if you itemize your income tax deductions (note that fewer people itemize because the standard deductions have increased in recent years). Interest rates are usually lower than non-secured loans, so you might lower your car payments this way.

Proceed with caution, though. If you can’t pay a conventional car loan, you can lose your car. If you can’t pay a home equity loan, you can lose your home.

5. Voluntarily Surrender Your Car

By July 2024, U.S. car repossessions increased 23% over the previous year. If you’re worried about having your car repossessed, consider a voluntary surrender.

Also called voluntary repossession, this happens when you elect to return your car to the lender. This has several advantages, the most crucial being that you are executing the process.

When a lender repossesses a car, agents arrive without notice and at their discretion. During a voluntary surrender, you remain in control.

To initiate the process, call your lender to inform them of your intent to voluntarily surrender your car. You will then make arrangements to return your vehicle, which allows you to plan ahead and avoid a situation where you have no source of transportation.

Your credit score will still take a hit, but the impact is smaller than the one from a repossession. If you feel that defaulting on your loan is unavoidable, or you’ve already defaulted, this option can mitigate the consequences.

6. Car Repossession

Allowing the lender to repossess your car should be the last resort. It will leave an ugly mark on your credit score. However, all may not be lost.

Your lender may permit you to get your car back through a process known as redeeming or reinstating your repossession. You pay enough to bring your loan current and pay off any fees that have been assessed. There is a small window — two weeks or less – if this is available, so don’t hesitate.

If this doesn’t work, your lender will send the car to an auction for sale, and you’ll still owe the deficiency balance — the difference between the auction sales price and what’s left on the loan. In addition, you’ll owe repossession costs.

So, how do you avoid such an unhappy ending? Here’s a last option worth considering.

7. Get a Budget, Stick to It, and Make Your Car Affordable

If you need an extra $50 or $100 a month to afford your car payment, there are plenty of methods, but you need a budget to identify them.

The New York Federal Reserve reported in early 2024 that auto loans totaled $1.63 trillion, a $10 billion increase from 2023. It also reported that auto loan delinquencies — payments over 90 days late — continued to rise.

Many of the people who can’t pay their car loans have bad credit scores, which could have resulted from their inability to pay their car loan. Regardless of which came first, lower credit scores raise the cost of borrowing for everything.

If you’re anxious about your credit score or just want to avoid lowering it altogether, you can get ahead by using an auto loan calculator to understand your car payments. If you fear the time for this has come and gone, however, all is not lost.

Millions of Americans have found relief through debt consolidation. A nonprofit credit counseling company combines your monthly bills into a single, affordable monthly payment and works with lenders to lower interest rates. That one payment should be lower than the combined total of all those previous bills.

A certified credit counselor then works with clients to construct a budget that will get them out of debt.

The only thing worse than being stuck in a traffic jam is to be stuck in one behind the wheel of a car you can’t afford.

The Bottom Line

If you can’t afford the payments on your beloved car, don’t despair. You have multiple options for keeping your car and preserving your personal finances.

From renegotiating your car loan, to tapping your home equity to make payments, to finding a less expensive vehicle, you have many tactics to consider.

What makes the most sense will depend on your specific situation, but consult an experienced financial expert to talk through a sensible strategy. If you miss a payment, communicate consistently with your lender.

Although missing car payments hurts your financial standing, it won’t take long to rebuild your credit if you take the right steps to catch up.