Auto Loan Debt Settlement: Your Options for Financial Relief
If you’re struggling to make your monthly car payments, you’re not alone. Auto loan debt has reached record highs, with the average monthly payment now over $700 for a new car and $500 for a used car. It’s no wonder so many folks are looking for options to lower their payments and get some breathing room.At Delancey Street, we understand money struggles. We want to help you understand your options so you can find the debt relief solution that works best for your situation. This article will walk you through the pros and cons of strategies like loan modification, refinancing, voluntary repossession, and settlement.
Work With Your Lender
The first step is to contact your auto loan lender directly. Many lenders have hardship programs to help borrowers who are facing financial difficulties. They would much rather modify your loan than see you default or go into repossession.Here are some potential options your lender may offer:
- Payment deferral – Your lender lets you temporarily pause or reduce your monthly payments for a set period of time. This can provide short-term relief, but interest still accrues.
- Interest rate reduction – Your lender lowers your interest rate, which drops your monthly payments. This works best if you got a high rate to begin with.
- Loan term extension – Stretching out your repayment period lowers your monthly dues but increases the total interest you pay over the life of the loan.
- Waiving late fees – If you’ve already missed payments, your lender may waive late fees to help you get caught up.
The best time to ask for assistance is before you miss a payment, but lenders may still work with you if you’re already behind. Be honest about your situation and provide documentation if requested.
Refinance Your Auto Loan
Refinancing replaces your current car loan with a new one, ideally with better terms. This allows you to lower your interest rate or extend your repayment period.To qualify for refinancing, you’ll likely need a good credit score and history. Shop around with multiple lenders to find the best offers. Online lenders like us at Delancey Street often offer competitive rates.The downside is that refinancing restarts your loan term. You may pay less each month but more overall in interest charges over the life of the new loan. Crunch the numbers carefully to see if it makes sense for your situation.
Modify Your Vehicle
If your payment no longer fits your budget, modifying your vehicle is another option. You have a few choices:
- Trade down – Swap your current vehicle for a less expensive used car with lower monthly payments. You may be able to transfer over some of what you still owe.
- Sell your car – Use the proceeds to pay down your loan balance. If you owe more than it’s worth, you may need to come up with extra money.
- Voluntary repossession – Surrender the car to your lender, but you are still responsible for any remaining loan balance. This damages your credit score.
Trading in or selling an upside down car can be challenging. Voluntary repossession also hurts your credit and may leave you with a balance due. Consider all angles before choosing one of these options.
Settle Your Auto Loan for Less
With auto loan settlement, your lender agrees to let you pay a lump sum that is less than your remaining balance, and the loan is considered paid off. This can be anywhere from 40% to 60% of what you owe.Settlement results in taxable forgiven debt, and it will show as “settled for less than owed” on your credit report. But it allows you to resolve the loan and move on. Compare settlement offers from your lender and third-party settlement companies.If you need more significant debt relief, settlement in combination with bankruptcy may be an option. This completely discharges personal liability for the debt. An attorney can advise you if it makes sense for your unique situation.
Know the Pros and Cons
Settling your auto loan or voluntarily surrendering your vehicle are last resort options with long-term consequences. Before making this big decision, be sure you understand the potential impacts:Pros
- Resolve unaffordable loan payments
- Avoid repossession and related fees
- Get out from underwater loan
Cons
- Credit score damage for several years
- Tax bill for forgiven debt
- No vehicle – need replacement transportation
- Possible balance due to lender
Look at the big picture. How will settlement or repossession affect your overall financial health? Will lack of a vehicle make it hard to get to work? Do you have other debts that also need attention?
Alternatives to Explore First
Settling or surrendering your car should not be the first option you jump to. Here are some other avenues to explore first:
- Credit counseling – Get help managing your overall debt and creating a budget.
- Debt management plan – A counselor helps negotiate lower payments with all creditors.
- Bankruptcy – Wipes out auto loan balance completely but severely damages credit.
- Borrower’s assistance – Government and nonprofit programs with grants or low-interest loans.
- Debt consolidation loan – Combines multiple debts into one payment.
- Balance transfer credit card – Move auto loan balance to a low intro APR card.
- Home equity loan – Use home equity to pay off car loan.
- Cash-out refinance – Refinance your home and take cash to pay down debts.
- Personal loan – Unsecured loan to pay off auto loan.
Some of these options may provide temporary relief or simply shift your debt around. Others could offer a permanent solution. Talk to one of our financial experts at Delancey Street to discuss your full range of alternatives.
Prioritize Your Financial Health
Struggling with auto loan payments is stressful. But you have options, and Delancey Street is here to help guide you. Managing your debt effectively now can improve your financial situation for years to come.Contact us today to start a free consultation. We’ll help you understand the pros and cons of different debt relief strategies for your unique situation. Our goal is finding the optimal solution to put you back in control of your finances.