Even before the COVID-19 pandemic sent the economy into a tailspin, millions of Americans were 90 days or more behind in their car payments. The coronavirus-inspired shuttering of businesses and Congress’ inability to agree on a second relief package has sent many more into delinquency.
No matter why you’re in that situation, you’ve got to take action. Here’s what to do if you can’t pay your car loan.
What Happens When I Miss a Payment?
A lot of bad things can happen when you stop paying your car loan. Each month you miss a payment lowers your credit score. If you can’t resume payments and get caught up, your car can be repossessed. Worse, you could still owe money on your former car after you no longer have it. The repercussions can stick with your credit rating for years, making it hard to borrow money again, and increasing the interest on any loan you do get.
Talk to Your Lender
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.
So, if you can’t make a payment, contact your lender before you get behind on your car payment. Tell them you’re struggling and ask if they have a relief program you might qualify for. Some financial institutions are willing to pause payments for a month or so without penalty, especially if you always paid on time. When you make the call, be prepared to suggest a payment amount you can afford in the short term.
The federal government urges lenders to work with consumers during the COVID crisis, so ask.
Refinance the Loan
Maybe a reason you’re struggling to pay your car loan is it has a high interest rate. Consider refinancing. By lowering your 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. Again, paying on time is important. If you’ve been missing payments, you’ve shot yourself in the financial foot.
Extending the terms of the loan can improve your immediate cash flow problem, but it comes at a cost. You’ll be paying on the loan for a longer time, which means you’ll ultimately pay more for the car by the time the loan is paid off. But that still can be better than failing to pay and have the car repossessed.
Don’t just talk to your existing lender about refinancing. Shop it around to a local lending institution.
Sell, Trade or Try Transit
You might want to ask yourself an unexpected question: Do you really need a car? More narrowly, do you really need that specific car that you’re driving?
If you live in a city with good local transit, you can save a lot of money – not only on car payments, but gas, insurance and upkeep. Or, perhaps COVID has you working from home rather than commuting daily. If you’re in a family with more than one car, maybe you don’t need them all.
Selling Your Vehicle
If you decide to sell your vehicle to pay off your loan, selling is financially wiser than trading it in – often 15% to 25% better, according to Kelley Blue Book. Take an example from Kelley’s online site: A hypothetical 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 a little more than $2,000.
It requires time to market the car through online or classified ads, and it might take a month or so to find a buyer who’s willing to pay what you want. But if maximizing the money is your motivation, it’s the way to go. If you don’t sell it for enough to pay off the loan, you’re going to have to come up with the difference another way.
Another possibility is finding a buyer who is willing to take over your payments. That only works if the loan is assumable – not all are – 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 negotiate for a fair price. An advantage is this can happen more quickly than a private sale, and when the transaction is complete, you still have wheels. Ideally, you’re not underwater on your car loan – that it’s 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 be able to trade it in, but whatever you owe that the trade-in offer doesn’t cover will be rolled into your new auto loan. Do the math. Exchanging one loan you can’t afford for another, isn’t progress.
Assuming you have been making your payments on time, your credit may have improved enough that a lower rate makes the replacement car affordable.
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, which is 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: Fewer people itemize because the standard deductions have increased in recent years.) Interest rates are usually lower than non-secured loans, so you might be able to lower your car payments this way.
But be careful. 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.
If you can’t make your car payments, this is the last resort. It will leave an ugly mark on your credit score. All, however, may not be lost.
Your lender may permit you to get your car back, which is known as redeeming or reinstating your repossession. You have to pay enough to bring your loan current, or nearly so, and pay off any fees that have been assessed. There is a small-time window – two weeks or less – if this is available, so don’t dawdle.
If this doesn’t work, your lender will send the car to an auction for sale, and you’ll still owe the difference between the auction sales price and what’s left on the loan, plus repossession costs.
So how do you avoid such an unhappy ending? Here’s a final option well worth considering.
Get a Budget, Stick to It and Make Your Car Affordable
There are a lot of areas people could cut back on if they need an extra $50 or $100 a month to afford their car payment, but to identify them, you need a budget.
If that were easy, the millions of Americans in auto-loan jams wouldn’t be honking for help. The New York Federal Reserve reported in early 2019 that a record 7 million car owners were over 90 days late on payments, a 1 million increase since 2010. And that was before most people had heard the word coronavirus.
Many of the people who can’t pay their car loans have bad credit scores – though they may have bad credit scores because they can’t pay their car loan. No matter which came first, lower credit scores raise the cost of borrowing for everything.
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. Or in this case, get them out of a jam.
The only thing worse than being stuck in a traffic jam is to be stuck in one while sitting in a car you can’t afford.
In his 40-plus-year newspaper career, George Morris has written about just about everything -- Super Bowls, evangelists, World War II veterans and ordinary people with extraordinary tales. His work has received multiple honors from the Society of Professional Journalists, the Louisiana-Mississippi Associated Press and the Louisiana Press Association. He avoids debt when he can and pays it off quickly when he can't, and he's only too happy to suggest how you might do the same.
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