What to Do if You Can No Longer Afford Your Car Payment

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What to Do if You Can’t Make Your Car Payments Anymore

Uh oh. Your car payment is due, but your bank account is looking pretty empty. We’ve all been there – life happens and sometimes you just can’t scrape together the cash to cover all your bills. Missing a payment or two on your car loan happens more often than you’d think. But don’t panic! There are things you can do to get back on track.

Talk to Your Lender

The first thing you should do is contact your lender. Let them know you’re having trouble making your payments on time. Most lenders are willing to work with borrowers who are struggling financially. They definitely don’t want to have to repossess your car if they can avoid it.

Your lender may be able to offer you some options, like:

  • Lowering your monthly payment amount
  • Extending the length of your loan to lower payments
  • Letting you skip a payment altogether
  • Deferring payments until you get back on your feet

The sooner you reach out, the more options they’ll likely have to help you. Ignoring the issue and avoiding your lender’s calls will only make things worse.

Prioritize Your Car Payment

If reworking your loan terms isn’t possible, really try to make paying your car loan a top priority. Transportation is crucial for getting to work, school, childcare, etc. You don’t want to risk losing your vehicle if you can avoid it.

Take a close look at your budget – are there expenses you can cut back on, even temporarily, to come up with the cash for your car payment? Things like:

  • Dining out
  • Entertainment/subscriptions
  • Clothing/shopping
  • Vacations

Use any extra money from your tax refund or stimulus payment towards your auto loan. Pick up a side gig delivering food or driving for a rideshare service to earn extra cash quickly.

Refinance Your Loan

If your credit score has improved since you got your original car loan, it may be possible to refinance your loan at a lower interest rate. This can significantly reduce your monthly payments. Compare rates from banks, credit unions and online lenders to find the best deal.

Just keep in mind that extending your loan term through refinancing resets the clock, so you’ll likely be making payments for longer. Run the numbers to see if it makes sense for your situation.

Sell Your Car

If all else fails, you may need to get out from under your expensive auto loan by selling your car. Hopefully you can sell it for enough to pay off your loan balance. If not, you may need to come up with the difference so the lender releases the title.

List your car for sale on sites like Craigslist, Facebook Marketplace and Autotrader. Consider selling it to an online dealer like Carvana or Vroom who can make the process quick and easy.

You may then need to buy a cheaper used car with cash or smaller loan payments you can actually afford. Not ideal, but it beats damaging your credit or having your car repossessed.

Voluntary Repossession

If you’re way behind on payments and have no way to catch up, voluntarily surrendering your car to your lender may be the best option. This is essentially giving up your vehicle instead of making the lender repossess it.

To do this, you’ll need to contact your lender and arrange to have the car picked up. Make sure you remove all personal belongings beforehand.

Voluntary repossession may be less damaging to your credit than forced repossession down the road. But it will still seriously hurt your credit score. And you’ll probably still owe money if the car sells for less than what you owe.

Auto Loan Discharge in Bankruptcy

Declaring bankruptcy can stop wage garnishment, lawsuits, and debt collection calls from your car lender. And in some cases, filing Chapter 7 or Chapter 13 bankruptcy will allow you to discharge (wipe out) part or all of the balance owed on your auto loan.

To qualify for auto loan discharge in Chapter 7 bankruptcy, you’ll need to prove the vehicle is not worth what you still owe on the loan. This is called being “upside down” on your loan.

In Chapter 13 bankruptcy, you can catch up on missed payments through a repayment plan over 3-5 years. At the end, any remaining auto loan balance is discharged.

Talk to a bankruptcy attorney to explore if this is a good solution for your situation. Keep in mind bankruptcy stays on your credit report for 7-10 years and can make it difficult to get approved for future loans and credit.

Dealing with Auto Loan Default

Defaulting on your auto loan happens when you are significantly behind on payments. Exactly how late you can get before being in default varies by state and lender. But in general, if you are 3-6 months behind, your loan is likely in default.

Here’s what may happen if you default:

  • Your lender can repossess your car at any time
  • You will owe late fees, penalties, and collection costs
  • Your credit score will plummet
  • You may be sued for the balance you still owe
  • Your wages may be garnished to repay the debt

Do everything you can to avoid default! Again, your best bet is communicating with your lender to modify your loan terms until you can get back on track.

Car Repossession Laws

If you do end up defaulting on your auto loan, it’s important to understand the laws around repossession where you live. Repossession laws vary quite a bit by state.

In some states, the lender can repossess your car as soon as you default on the loan. In others, you have to receive written notice and a chance to catch up on payments before they can take your vehicle.

Lenders must follow your state’s laws on where and when they are allowed to repossess your car. For example, they can’t take it from your closed garage, or after a certain time at night.

If your vehicle is repossessed illegally, talk to a consumer protection attorney about your options. You may be able to sue the lender for breaking repossession laws.

Learn more about your state’s repossession laws from your state attorney general’s office.

Alternatives to Repossession

Losing your vehicle to repossession should be a last resort. Most lenders don’t want to go through the hassle of repossessing and selling your car if they can avoid it.

Before the repo truck shows up in your driveway, ask your lender about these alternatives:

  • Reinstatement – Paying the total amount you are behind on your loan to bring it current
  • Forbearance – A temporary pause on making payments
  • Hardship programs – Special assistance for borrowers facing financial difficulties
  • Extensions – More time to pay off the loan

Explore all options to catch up and keep your car. Having reliable transportation is essential for most people.

Your Rights in Repossession

While lenders have a legal right to take back collateral on defaulted loans, some of your rights include:

  • Right to receive written notice of repossession
  • Right to get your personal property back from the vehicle
  • Right to pay the loan balance and get the car back (redemption period)
  • Right to any surplus from the car’s sale above the amount you owed

If you believe the lender did not follow proper repossession procedures, file a complaint with the Consumer Financial Protection Bureau or your state attorney general.

Beware of Auto Loan Scams

When you’re desperate to get out from under your car loan, scammers may try to take advantage. Avoid any company that promises it can make your loan go away or get your repossessed car back. They are likely scam artists.

Also watch out for predatory car title loans if you use your paid-off car as collateral. These have extremely high interest rates and risky terms.

Stick with legitimate lenders and nonprofit credit counseling agencies. Don’t believe anything that sounds too good to be true.

Rebuilding Your Credit

Having your car repossessed or going through bankruptcy will trash your credit scores. But don’t worry – you can rebuild your credit over time.

Getting current on any other loans or credit accounts will help. Also consider getting a secured credit card and making small purchases you can pay off each month. This demonstrates you can use credit responsibly.

Check your credit reports regularly and dispute any errors with the credit bureaus. This can boost your scores as inaccurate negative information gets removed.

Within a few years of smart credit management, your scores will improve and make it easier to get approved for financing in the future.

Getting a Car After Repossession

So your car got repossessed. Now you need wheels to get to work and take care of your family. What are your options?

  • Buy a cheap used car with cash
  • Borrow from family or friends and create a written loan agreement
  • Take out a secured auto loan using money you’ve saved as collateral
  • Try ridesharing, public transportation, bicycling if possible

Avoid predatory “buy here, pay here” dealers selling old cars at inflated prices with high interest rates. This will just get you stuck in another unaffordable loan.

Focus on rebuilding your credit before taking out another auto loan. Shop around for the best rate once your credit score improves.

Getting Your Repossessed Car Back

Is it possible to get your repossessed car back? In some cases, yes – if you act quickly and have the cash.

Many states have redemption periods – a window of time where you can pay off the full loan balance and repossession fees to reclaim your vehicle. This may range from 10 days to a month after repossession.

You will need to contact the lender immediately and get the exact payoff amount. Scramble to borrow money from family or friends or use your savings to get your car back.

If you can’t come up with the cash within the redemption period, the lender will auction off your car to try to recoup their losses from the defaulted loan.

What Happens After Repossession?

Losing your car to repossession is frustrating and stressful. But what happens next?

The lender will sell your car at auction. If it sells for less than what you owe, you will still be on the hook for the remaining loan balance, fees, storage costs, etc. The lender can sue you or hire debt collectors to get this money.

Your credit score will plummet making it very hard to get approved for financing. The repossession will show on your credit report for 7 years.

If you need a car, you’ll have to rely on public transportation, buy an old beater with cash, or borrow a family member’s vehicle until you can rebuild your credit.

Don’t let it get you down. Stay focused on getting back on your feet financially.

Here are some additional tips for rebuilding your credit after a car repossession:

  • Get a secured credit card. This requires a refundable security deposit that becomes your credit limit. Making on-time payments can help rebuild your credit.
  • Become an authorized user on someone else’s credit card. As long as they use the card responsibly, it can benefit your credit as well.
  • Pay down other debt balances. Having high balances on credit cards and loans hurts your credit utilization ratio. Pay down balances as much as possible.
  • Check for reporting errors. Dispute any inaccurate information on your credit reports to boost your scores.
  • Limit new credit applications. Too many hard inquiries from applying for new credit makes you look risky.
  • Consider credit counseling. Reputable nonprofits can help you manage debt and create a plan to improve your finances.
  • Build savings. Having cash reserves helps you avoid relying too much on credit when emergencies arise.
  • Be patient. It takes time to rebuild credit after a major setback. But staying diligent will pay off.

A car repossession can feel devastating but it’s not impossible to bounce back. With a positive attitude and smart credit habits, your scores can recover and you’ll get back on the road again.

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