Many people were thrown into financial turmoil at the beginning of the COVID-19 pandemic. Previously secure jobs disappeared, and monthly payments went from affordable to impossible overnight. A year later, borrowers are still catching up—and some are struggling to make ends meet. So, if you can’t afford your car payment, what are your options?
We have eight solutions to an unaffordable car loan in this article. Some are easier to implement than others—and some come with long-term credit implications:
- Modify Your Auto Loan
- Refinance Your Vehicle Loan
- Trade in Your Car
- Let Someone Else Assume Your Loan
- Sell Your Vehicle
- Turn the Keys In
- Let Your Car Be Repossessed
- File for Bankruptcy
1. Modify Your Auto Loan
How can you lower your car payments without refinancing? Before you do anything else, speak to your lender about modifying your auto loan. Call your auto loan company as soon as you can, and tell them about your financial troubles. Ask if they have any relief options for borrowers, including loan modifications.
Many lenders made changes to their modification policies in response to the COVID-19 pandemic. Temporary loan forbearance and extension programs, for instance, help borrowers get back on track.
Perhaps surprisingly, many lenders let borrowers in good standing pause their auto loans for a month once a year. Of course, you’ll have to make an extra payment at the end of your loan term to make up the difference—and you might have a little extra interest to pay.
2. Refinance Your Vehicle Loan
How do you get out of a car loan you can’t afford? The answer might be to refinance your vehicle. If you have a good payment history and a strong credit profile, use it to your advantage. Here are two ways to play the refinancing game:
Let’s imagine you bought your car for $20,000 two years ago. Your original 60-month auto loan came with a 5.5% interest rate, and your monthly payments are $382.02. Your current loan balance is $12,600.
If you extend your loan by five years, your monthly payments will drop to $241. You’ll have $141 more spending money each month—but you’ll pay more in interest over the life of your loan, plus you’ll have to make payments for a longer time period.
3. Trade in Your Car
If you can’t afford your car payment any more, consider trading in your vehicle. Think about your automotive needs—could you get away with a smaller car, for instance? Do you need a truck, or would it be easier to park a sedan in your driveway?
Swapping your SUV for a smaller model isn’t just environmentally friendly—it’ll also cost less to run. Switching from a new luxury vehicle to a slightly older regular brand auto, on the other hand, could cut your insurance bill significantly. Either choice will reduce your car payment.
If you do decide to trade in your car, get quotes from several dealerships. Then, negotiate a fair price with your favorite dealership and choose an alternative vehicle. If you’re not upside-down in your current loan—if you don’t owe more than it’s worth—you might even be able to trade upto a newer vehicle with better loan terms.
4. Let Someone Else Assume Your Loan
Some loans and leases are “assumable,” which means that they’re transferable from one party to the next. If you can’t make your loan payments any more but you want to avoid damaging your credit, consider passing the loan, and the vehicle, to someone else.
Before you agree to pass your car on, talk to your lender. Most lenders have minimum credit and income requirements for buyers—and the person you transfer your vehicle to will need to meet these terms.
5. Sell Your Vehicle
Do you need a vehicle right now, or can you use public transportation until your finances settle? If buses or trains are an option in your area, consider selling your vehicle privately and using the money to pay off the remainder of your loan. Doing so could help you escape a car payment altogether—plus private sales nearly almost generate more money than dealer trade-ins.
6. Turn the Keys In
Can you give your car back to the finance company? You sure can! Also called “voluntary repossession” or “voluntary surrender,” walking away from your vehicle is a last-resort option if you can’t refinance or sell your car.
Unfortunately, there are consequences associated with turning in your keys. On the one hand, the repo man won’t pay you a personal visit, which can save embarrassment. On the other, the lender might still try to collect money from you if you owe more than they can get for the vehicle at auction. A voluntary repossession will also show up on your credit report.
If you do decide to turn your keys in, contact your lender and tell them your intentions. Your lender will guide you through the process and let you know when and where to hand over your car.
7. Let Your Car Be Repossessed
The alternative to voluntary surrender is straight repossession. This option is perhaps the most stressful, and it can severely affect your credit. In a nutshell, you simply wait until you’re so behind with payments that your lender decides to repossess the vehicle. Then, your car—and anything you leave inside—is towed away. You might want to consider this as a last option—carefully look at your resources and consider exhausting your other options before you decide.
8. File for Bankruptcy
If you’re in a huge financial hole and you owe a lot of money beyond your car payment, you could consider bankruptcy. Bankruptcy is complicated and can pull your credit down for a decade, so it’s not an option to consider if there are any alternatives open to you. Before proceeding, take a good look at your finances and contact a well-regarded bankruptcy attorney.
Take Care of Your Finances with Credit.com
Whatever you decide to do, it’s important to keep track of your credit. Sign up with Credit Report Card to view your Experian VantageScore 3.0 and see a helpful credit snapshot, which you can use to create a financial plan.