If you can’t afford to make your car payments, it might seem like losing your vehicle is inevitable. Thankfully, that’s not true. While your chances of keeping your car are better if you have a high credit score, you can avoid defaulting on your auto loan even if you don’t have the best credit history. You have several options, some of which will allow you to keep your car and others that require you to let it go. This article will examine what those options are.
Written by Attorney Curtis Lee.
Updated October 8, 2021
You bought yourself a car. And like most car buyers, you took out a loan to help pay for it. At the time of purchase, you could easily afford your monthly car payments. But due to a significant change in your finances, you can no longer afford them. In other words, a default is inevitable. So what do you do?
You have several options, some of which will allow you to keep your car and others that require you to let it go. Let’s start by examining what you can do if you want to keep your vehicle.
Options To Keep Your Car
If you can’t afford to make your car payments, it might seem like losing your vehicle is inevitable. Thankfully, that’s not true. While your chances of keeping your car are better if you have a high credit score, you can avoid defaulting on your auto loan even if you don’t have the best credit history.
Refinance Your Car Loan
If you refinance your car’s original loan, it means you take out a new loan and use the proceeds from it to pay off the old loan. In most cases, the new loan will come from a new lender. If you do this, you’ll replace one monthly car payment with another one. So what’s the point? The point is to make the monthly payments for your car more affordable by making them smaller. There are three ways you can do this.
First, you get a lower interest rate on the new loan. Second, you extend the term of your car loan. This allows you to make smaller payments over a longer period of time. Third, you do both.
If your credit score has gone up significantly since you first bought your car, or you took out your car loan when interest rates were high, there’s a decent chance you can refinance your car loan with a lower interest rate. Depending on how much lower your interest rate is, you could enjoy noticeably lower monthly car payments.
If your credit score hasn’t gone up, or you otherwise can’t refinance your car loan with a lower interest rate, you still have the option to extend your loan’s term. For example, say you had just two years left on your car loan but you were struggling to make the payments. You refinanced and were able to cut your monthly payment in half. Now you now have five years until your car is fully paid off.
But beware of the catch. Though you’ll be making smaller car payments each month, you make more of them. That means, even with the same interest rate, you’ll be paying more money in the long run for your vehicle. But if keeping your vehicle is that important to you, it may be worth the added cost.
If you’ve got excellent credit but your income is small or unpredictable, you can combine the two approaches and refinance to get a lower interest rate with an extended car loan term. This can reduce your monthly payments while lowering your interest rate. The lower interest rate helps reduce how much extra money you have to pay on the loan overall because you lengthened the term.
Ask Your Lender About Hardship Programs
It might be hard to believe but most lenders don’t want you to default any more than you do. So they’re often willing to work with you to provide some assistance to help you get through your financial hardship and continue making car payments. This has become especially common during the coronavirus pandemic. Not all lenders have hardship programs, but the ones that do will usually offer loan deferrals/extensions and/or late-fee waivers.
With a deferral (sometimes called a loan extension), your lender agrees to let you push back the due date of your next payment or two. When this extension is over, you resume making your loan payment as normal. The overall length of your car loan will be extended by the same amount of time as your deferral. So if you received a two-month deferral, your car loan’s term would be extended two months. Most extensions or deferrals are only for a few months. In most deferral programs, interest will continue to accrue while your payments are being deferred. Despite this added cost to your car loan, it shouldn’t show up on your credit report and adversely affect your credit score.
When a borrower asks for a late-fee waiver, the lender will agree not to collect a late fee when the borrower makes a payment past its due date. As long as you make your payment within 30 days of its due date, it shouldn’t affect your credit score. That’s because federal law prohibits lenders from reporting late payments to the major credit bureaus (Experian, TransUnion, and Equifax) until they’re 30 days late or more.
Given the limited scope of these financial hardship programs, they’re most helpful if your financial struggles are short term. For example, if you’re the victim of a natural disaster or you lost your job.
Options To Get Rid of Your Car
If you still can’t make your car payments using the above-mentioned strategies, you’re probably better off getting rid of your car. If you decide to take that approach, you can get rid of your monthly car payment. But understand that you may still be liable for any difference that exists between how much you owe on the loan and how much your car is worth.
A voluntary repossession occurs when you contact your lender and tell them you can’t make any more payments on your auto loan. As a result, you’ll agree to meet your lender’s representative at a predetermined time and place to hand over your vehicle. After taking possession of your vehicle, your lender will sell it. If they can’t get enough money to fully pay off your loan, then you must pay the difference. This is sometimes called a deficiency balance.
One exception to having to pay the deficiency balance is if you file Chapter 7 bankruptcy. Chapter 7 bankruptcy allows borrowers to discharge debts that consist of remaining loan balances, including those stemming from secured and unsecured loans. The last part of this article will discuss how bankruptcy works when you have an unaffordable car loan.
If you’ve incurred any late fees due to missed payments, you will need to pay those too, as well as a possible prepayment penalty. A prepayment penalty is a fee you pay because you paid most or your entire loan ahead of schedule. These normally apply to home mortgages but can apply to car loans, too.
Advantages of Voluntary Repossession
If you default on your car loan, your lender can repossess your vehicle at any time. The biggest advantage voluntary repossession has over involuntary repossession is that you can avoid repossession fees, which often add up to a few hundred dollars. It can also reduce the uncertainty and anxiety regarding when and how the repossession will take place. An involuntary repossession can occur at any time and place. Not knowing when this might happen can be very stressful.
Any repossession, whether voluntary or involuntary, will stay on your credit history for up to seven years. But voluntary repossession may have less of a negative impact on your credit score. Though this will depend on how the credit reporting bureau lists it. Voluntary repossessions may show up as a “voluntary surrender” instead of a repossession. If this happens, your credit score will take less of a hit. While a computer may view a voluntary and involuntary repossession similarly, voluntary reposssessions may look better to a human reviewing your credit history.
Sell Your Car
If your car is worth more than what you owe on your auto loan, selling it is a great option to consider. After the sale is complete, you’ll no longer have a car loan to make payments on and you can use the leftover cash to perhaps buy a used car as a replacement vehicle. It may not be as nice as a new car, but you won’t have any car payments to worry about.
But what do you do if you owe more on the vehicle than it’s worth? In this case, your car loan is underwater or upside-down, and selling it may not be a good option. That’s because after you sell your car, you’ll have to find a way to pay what you still owe your lender. This could involve getting another loan to pay the last of what you owe.
Getting another loan won’t be easy, and you’ll need a great credit score to get an unsecured loan with good terms, such as a low interest rate. But if you have bad credit and get a loan with a high interest rate, you might still manage to have affordable payments. After all, your loan will be much smaller because it’s only for the difference between what you owed on your auto loan and your vehicle’s value.
Before you sell your car, make sure you have a plan to deal with your transportation needs. If you don’t have an alternative method of getting to work or running errands, not making a car payment could soon be the least of your worries. Once you decide to sell your car, make sure you get top dollar for it. This will probably require you to sell it through a private sale instead of selling it to a dealership. Having a dealership buy your car will be a lot less work, but you’ll get a lot less money for your vehicle.
Bankruptcy and Unaffordable Car Loans
If you can’t afford your car payments, there’s a fair chance you’re having trouble paying your other bills as well. You might also be saddled with a lot of debt. If you find yourself in this financial situation, it might be time to consider filing bankruptcy. Individuals can choose to file either Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 vs. Chapter 13 Bankruptcy
Chapter 7 bankruptcy allows borrowers to discharge, or erase, the majority of their debts, such as:
Credit card debt
Payday and personal loans
Chapter 7 is one of the most sought-after forms of bankruptcy because of the borrower’s ability to wipe out their debts. This makes it a great option for many working-class individuals. But not everyone is eligible to file bankruptcy under Chapter 7. Only individuals who pass a Means Test can use it. This test helps the court decide your means, or ability, to pay back your debts. If the test determines you don’t have the means to do so, you can use Chapter 7 bankruptcy.
If you can’t pass the Means Test, you can still file Chapter 13 bankruptcy. Chapter 13 is a bit different than Chapter 7 in that the borrower has to pay at least a portion of their debts to the bankruptcy trustee. This trustee will then distribute this money to the borrower’s creditors. A borrower will follow this repayment plan for 3-5 years. If any debts remain after this time, they will be discharged.
At first glance, it may seem like everyone who wants to file bankruptcy will want to file under Chapter 7. But that’s not always true. When deciding whether to file Chapter 7 or Chapter 13 bankruptcy, one of the biggest considerations is if you want to keep your home or car. Chapter 13 bankruptcy allows borrowers to reorganize their debts. This includes creating a new payment schedule for your car loan. So if you want to keep your car, but still file bankruptcy, you should strongly consider filing bankruptcy under Chapter 13.
Keeping Your Car in a Chapter 7 Bankruptcy
Chapter 7 bankruptcy makes it possible for you to discharge your car loan. But to do this, you must surrender your vehicle to your lender. After the lender gets the vehicle back, your car loan gets discharged, even if the car was underwater (worth less than what you owed on the car loan). Any remaining deficiency balance also gets discharged.
But if you want to keep your car with Chapter 7 bankruptcy, you’ll have to complete and sign a reaffirmation agreement. If you have a bankruptcy lawyer, they’ll also need to sign off on it. If you’re pro se (handling your bankruptcy case without an attorney), then the court must sign off on it, usually after holding a reaffirmation hearing.
If the reaffirmation agreement gets approved, you’ll keep the car and continue making payments on it. But if you default, you’re liable for not only the remaining debt but also any deficiency balance. Given your opportunity to discharge the car loan in a Chapter 7 bankruptcy, you need to think long and hard about whether it’s worth keeping the car with a reaffirmation agreement. The last thing you want to do is be unable to afford your car payments for a vehicle that’s worth less than what you owe. Then you’ll be on the hook for this deficiency balance that can’t discharge because you already filed Chapter 7 bankruptcy.
If you can’t afford to make your auto loan payments, you have options to consider. You’ll have to first decide if you want to keep the car or get rid of it. If you’re fine with getting rid of the car, you can sell it, surrender it through voluntary repossession, or file Chapter 7 bankruptcy. If you want to keep your car, you can see if your lender offers a hardship program, refinance your car loan, file Chapter 13 bankruptcy, or file Chapter 7 bankruptcy and sign a reaffirmation agreement.
If you are struggling with your car payments and struggling to make payments on your other debts, bankruptcy is sometimes the best choice. But before declaring bankruptcy, you want to fully explore all your options. Consider talking to a credit counselor first. If you don’t use an attorney, you can get help with your bankruptcy from Upsolve, a nonprofit organization that can help you file Chapter 7 bankruptcy for free.