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What To Do When You Can't Make Your Car Payment

For those that can not afford their car payment there appears to be a new option; auto loan modification.  The government is not involved (yet) and there is no special 800 hope number to call, but auto loan default rates are reaching levels where lenders are willing to make deals.  A letter that I received this week from a young man just graduating from college outlined his desperate situation involving an auto loan with a 22 percent interest rate.  To make matters worse, he owes $11,000 more on the vehicle than what it is worth.  He literally sees no way out and is searching for answers.

1.  What Is The Difference Between A Repossession and Voluntary Repossession?

At one time there was a meaningful distinction between a repossession and giving your car back (known as a voluntary repossession).  In terms of your credit and your financial liability, whether they come to get it or you drive it in and hand them the keys you are pretty much in the same situation.  In some cases, by offering to voluntarily surrender your vehicle you may be able to get the lender to agree to forgive any remaining balance you owe. 

2.  Can I Sell My Car To Get Out From Under The Payment?

Selling your vehicle is an excellent option as long as you are not upside down on the loan.  If you owe more than the car is worth, you will have to bring cash to settle the difference before being able to transfer the title.  Even if you have to take out another loan for the difference, you would be far better off than trying to sustain a payment you can’t afford. By selling the car yourself, you will be able to get retail value as opposed to the liquidation of your vehicle at auction. 

3.  What Happens After The Repossession?

Virtually all auto loans and leases are personally guaranteed.  This means that even though the car is returned, you are still personally responsible for the debt.  Although the process varies from state to state, the vehicle will typically be sold at auction and you will owe the difference (the deficiency).  The lender may then go to court to file suit against you for a deficiency judgment.  An auto loan that has defaulted will be a major blemish on your credit file.  After about three to four years, you may be able to obtain another auto loan, but it will likely be at a very unfavorable interest rate.

4. What About Trading My Car In For A Lower Payment?

This rarely makes financial sense as your existing loan is simply rolled into the new loan leaving you that much more upside down in the next vehicle.

5. Can I Refinance My Loan To Get A Lower Payment?

If you are not upside down in your current vehicle, you may be able to refinance to achieve a more affordable payment.  Historically, the best deals on auto loans are usually from credit unions.  Start with your credit union.  If you are not a member of a credit union, consider joining one in your community.  Another great online resource is Bank which has an auto loan shopping service.

6.  What Options Do I Have With My Current Lender?

If you are unable to make your payments you may find relief in one of two forms.  First, your lender may offer a temporary forbearance.  This will allow you to skip a payment or two and then pay that at the end of the loan term (with interest).  In some cases, you may be able to make interest only payments for several months.  Secondly, you may be able to obtain a loan modification.  This may include a longer repayment period, a lower interest rate, and may represent a win-win for all parties involved. 

There are a number of companies that you can hire to work with you on obtaining a modification of your auto loan, although you can do this on your own.  This is not as complicated as a home loan modification and should be something an individual consumer can tackle without paying hundreds of dollars to a consultant.  If you are at the brink of bankruptcy, an attorney can become involved in a situation like this to assist you on reaching a settlement with your lender.

7.  Can I Get Out Of My Auto Lease?

Most auto leases can be transferred.  If you are unable to make your lease payments, consider a company such as  They provide an online marketplace for individuals looking to take over existing auto leases.  I was very impressed with their website and what appears to be a well executed concept.  Of course, if you have exceeded your mileage allowance or are otherwise ‘upside down’ in your lease this option will not work for you (unless you have the cash to make up the difference at closing).

My best advice, pay cash for your vehicles and don’t let yourself get into a trap of a several hundred dollar payment for five years or longer.  I drive a 2002 Ford and it is paid for.  I have nearly 200,000 miles on it but I am always reminded that there is no payment book to worry about.  I have heard all of the stories about why paying cash for a car is impossible, but have been convinced by none of them.  Take a second job and save up the money to buy a vehicle that represents basic transportation.  Financing an automobile is at the very top of my list of the worst financial decisions a consumer can make.

Did you get out of a car payment you could not afford?  Share your story in the comment section below.

Helping you make the most of God’s money!

James L. Paris
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