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Alternatives to Auto Loan Debt Settlement to Explore First

Taking on an auto loan can be a great way to get the car you need, but sometimes life happens and you find yourself struggling to make the monthly payments. If you’re facing auto loan debt you can’t manage, debt settlement may seem like the best option – but it should really be a last resort.

Debt settlement involves stopping payments on your loan and trying to negotiate a lump sum payment for less than you owe. This can hurt your credit score and leave you vulnerable to collections calls and potential lawsuits. Before considering debt settlement, you’ll want to fully explore other alternatives that are less risky and may cost you less in the long run.

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Refine Your Budget

The first thing to do is take a close look at your overall budget. Are there any expenses you can cut back on to free up more cash for your car payment? Even relatively small spending cuts on things like dining out, entertainment, or impulse purchases can make a difference. Use an app like Mint or YNAB to track all of your spending for at least a month – that will show you exactly where your money is going.

Earn Extra Income

Bringing in some additional income can provide the funds you need to stay current on your auto loan. Consider picking up a side gig in addition to your regular job, such as:

  • Driving for a rideshare service like Uber or Lyft
  • Delivering food for DoorDash, Grubhub, etc.
  • Walking dogs, house sitting, or pet sitting through Rover or
  • Selling handmade crafts through Etsy
  • Completing tasks online through Amazon Mechanical Turk, Fiverr, Upwork, etc.

Every little bit helps when you’re trying to get back on track with debt payments.

Sell Unnecessary Assets

Take an inventory of items you own that you could live without, like:

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  • Electronics
  • Jewelry
  • Designer clothes/bags
  • Sporting equipment
  • Musical instruments
  • Collectibles

Sell these through Craigslist, Facebook Marketplace, eBay, or apps like OfferUp and LetGo. Use the extra money to pay down your auto loan principal faster.

Negotiate With Lenders

Contact your auto loan lender as soon as you realize you’ll have trouble making payments going forward. Don’t wait until you’ve missed payments. The lender may be willing to modify the loan terms to make it more affordable, such as by:

  • Extending the repayment term to lower the monthly payment
  • Reducing the interest rate to save on finance charges
  • Adding missed payments to the end of the loan term
  • Allowing interest-only payments for a period of time

You may also look at negotiating with other lenders for relief. For example, a mortgage lender may let you skip a payment or two if you explain the situation.

Refinance the Auto Loan

If your credit is still in decent shape, refinancing the auto loan could significantly reduce your monthly payment. You can refinance for a longer term, which lowers the payment by spreading it out over more time. Or you may be able to get a lower interest rate than you currently have, especially if your credit score has improved.

Shop around with online lenders like LendingTree and Lightstream to compare interest rates. Credit unions also tend to have competitive rates. Just be sure to compare all the costs, not just the interest rate – look at origination fees, prepayment penalties, etc.

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Lower Insurance Costs

Take a look at your auto insurance policy – there may be ways to lower your premiums and free up cash for other bills:

  • Increase deductibles on collision/comprehensive coverage
  • Drop optional coverages like roadside assistance
  • Ask about discounts for things like good driving record, good student, anti-theft devices, etc.
  • Shop around for better rates from other insurers

You may also look at dropping comprehensive/collision coverage altogether if your car is worth less than $3,000 or so. Just keep in mind you’ll be responsible for repairs or replacing the vehicle if it’s damaged or stolen.

Sell the Car

If nothing else works, you may need to get out from under the auto loan by selling the car. Ideally you would sell it for enough to pay off the loan balance in full. But if your car is worth less than you owe, you would need to come up with the difference to pay off the lender.

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Compare offers from CarMax, Carvana, Vroom and local dealers to see who will pay top dollar for your vehicle. A private party sale may fetch even more money, but takes more time and effort on your part.

Voluntary Repossession

When all other options are exhausted, voluntary repossession may be the only way out if you can’t afford to pay the auto loan balance. You’ll sign the car over to the lender and they’ll sell it to recoup their losses. But you’ll still owe any difference between the car’s value and your loan balance.

The lender can sue you for this deficiency balance. And your credit will suffer from the late payments, repossession, and collections account if they don’t sue. So voluntary repossession should really be an absolute last resort if you have no other choice.


Filing for Chapter 7 or Chapter 13 bankruptcy is an option if your auto loan debt is part of a larger financial crisis. The downsides are the high legal fees involved and the long-term damage to your credit. Bankruptcy should be considered only after you’ve tried everything else.

If you lost your job and don’t expect your income to recover enough to pay the debt, Chapter 7 bankruptcy may discharge the balance so you don’t have to pay it. Or a Chapter 13 repayment plan can help by reducing interest rates and creating more affordable payments over 3-5 years.

Weigh the Pros and Cons

Before making any decisions about your auto loan debt, think carefully about the pros and cons of each option:

  • Refinancing – Lower payments but costs more over the long run in interest
  • Selling the car – Debt goes away but you lose the vehicle
  • Voluntary repossession – Lose the car and still owe a balance
  • Debt settlement – Resolve the debt but hurt your credit and get harassed by collectors

Ideally you can find a solution that lets you keep the car while becoming more affordable. But focus on whichever option damages your credit the least and sets you up best financially down the road.

Get Professional Help

If you aren’t sure how to manage overwhelming auto loan debt, don’t go it alone. Nonprofit credit counseling agencies can provide guidance for free. Reputable options include:

The counselor can review your full financial situation and walk you through all the alternatives. They’ll help develop a personalized plan to deal with the auto loan debt in the healthiest way possible.

You may feel stuck when you owe more on your car than you can afford to pay. But avoiding hasty decisions gives you the best chance of resolving the situation while limiting damage to your finances and credit. Weigh all the options, get professional advice, and take action before you fall too far behind.


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