Credit Score Damage Control When Seeking Auto Loan Debt Relief[yoast-breadcrumb]
Credit Score Damage Control When Seeking Auto Loan Debt Relief
Getting into debt trouble with your auto loan can be scary. Missed payments lead to late fees, penalty interest rates, and calls from collectors. Before you know it, you’ve fallen way behind and your credit score took a nosedive. But it’s not hopeless! With some strategic credit damage control, you can get back on track. This article will walk you through your options, so you can find the debt relief solution that works best for your situation–without obliterating your credit.
First Steps: Communication and Budgeting
When those missed payment notices start rolling in, it’s tempting to avoid them. But sticking your head in the sand won’t make it go away! The first step is to open the lines of communication with your lender. Give them a call, explain your situation honestly, and see if they can offer any assistance–maybe lower payments or reduced interest rates. Lenders want to get paid, so they may work with you.
Next, take a hard look at your budget. Where can you trim expenses to free up cash for the car payment? Downsize your cable package, eat out less, or pause contributions to savings. If you can swing even the minimum payment, it will minimize damage and show good faith.
Weighing Options for Auto Loan Debt Relief
If you’ve cut expenses to the bone and still can’t swing the payment, more drastic debt relief may be needed. Here are some options to consider:
Ask your lender about formally modifying the loan terms, like:
- Lower interest rate
- Smaller monthly payment
- Extended repayment period
This requires lender approval but prevents default or repossession. It shows up positively on your credit report.
If your lender won’t budge, refinancing through another company resets the loan with better terms. You’ll need good credit for approval. Refinancing to lower payments can help you avoid default.
Selling the Car
If your car is worth more than you owe, selling it pays off the loan and gets you into a cheaper used car. List it online or at a dealership. Use the proceeds to satisfy the loan, avoiding a hit to your credit.
If you’re severely underwater on the loan, voluntarily surrendering the car returns it to the lender. They’ll sell it and you’ll owe the deficiency balance. This damages your credit, but less than defaulting.
Hire a debt settlement company to negotiate a lump sum payoff with your lender, usually 30-50% of the balance. This settles the debt but wrecks your credit score. The car will be repossessed.
The Impact on Your Credit Score
Any form of debt relief will likely hurt your credit score–it means you couldn’t pay as agreed. But some options are less damaging than others. Here are the impacts, ranked best to worst:
- Loan modification – Minor impact
- Refinancing – Minor to moderate impact
- Selling car – Little to no impact if loan paid off
- Voluntary repossession – Major negative impact
- Debt settlement – Severe damage, up to 100-point drop
Avoiding default and reducing the loan balance helps minimize score damage. Expect your credit to recover in 1-2 years of on-time payments.
Other Credit Damage Control Tips
Beyond the debt relief approach, you can take other steps to protect your credit standing:
- Keep all other accounts current – don’t snowball
- Pay down credit card balances
- Dispute any errors on your credit reports
- Limit new credit applications until back on track
Managing your accounts responsibly shows credit bureaus you’re committed to paying what you owe.
When to Seek Professional Help
If you’re totally overwhelmed, reach out for guidance. Nonprofit credit counseling provides free or low-cost advice. Avoid shady “credit repair” companies promising to “fix” your credit overnight.
If loan modification or refinancing isn’t possible, an attorney can ensure the repossession and deficiency process goes smoothly while protecting your rights.
The most important thing is taking action before things spiral out of control. Don’t wait until your car is repossessed in the middle of the night! With diligence and a proactive approach, you can take back control of your auto loan debt.