I Can’t Afford My Car Payments – What Are My Options?

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 auto 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 your car payments, you aren’t alone, but no matter the reason for the situation, 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 Payment?

There are several consequences that await if you stop paying your car loan. For starters, your credit score gets dinged each month you miss a payment. In addition, you risk the car getting repossessed if you fail to resume payments. Worse still, you could owe money on your former car even after you lose possession. These repercussions can haunt 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

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 are willing to pause payments for a month or so without penalty, especially if you always pay on time. When you make the call, be prepared to suggest a payment amount you can afford in the short term.

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 comes at a cost. By paying on the loan for a longer time, you’ll ultimately pay more for the car by the time the loan is paid off, but that’s far better than failing to pay and having your car repossessed.

Lastly, don’t just talk to your existing lender about refinancing. Shop it around at a local lending institution.

Sell, Trade, or Try Transit

Here is an unexpected question you might want to ask yourself: Do I really need a car? To be more specific: do I really need this particular car that I’m driving?

If you live in a city with good local transit, you can save a lot of money by opting for that instead. Not only will you save on car payments, but you’ll also save on gas, insurance, maintenance, and upkeep. Perhaps you can carpool on your daily commute. If you’re in a family with more than one car, try to 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 so 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 is willing to 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 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 be able to 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 ultimately unhelpful.

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 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 be able to 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.

Voluntarily Surrender Your Car

By July of 2024, car repossessions in America were up by 23% when compared to the numbers from the year prior. That’s quite the incline. If you’re worried you may be in the same boat, consider beating repossession of your vehicle with a voluntary surrender.

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

When your car is involuntarily repossessed, agents will often 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.

It is true that 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.

Car Repossession

This 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 will have to pay enough to bring your loan current 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 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 final option well worth considering.

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 after 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, not all hope is 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. 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 behind the wheel of a car you can’t afford.