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Options for Auto Loan Debt Relief When Facing Financial Hardship

Falling behind on your auto loan payments can be super stressful. You’ve got other bills piling up, creditors calling, and your credit score is tanking. It’s easy to feel totally overwhelmed. But there are options to get your auto loan under control, even if money’s tight.

This article walks through strategies like loan changes, refinancing, voluntarily giving back the car, and more. That way you can find the right debt relief solution for your situation.

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Talk to Your Lender

The first thing to do when you know you’ll have trouble making your monthly car payment is contact your lender ASAP. Ignoring the issue won’t make it disappear – it’ll only get worse. Auto lenders would much rather change your loan than take your car back, so don’t be scared to reach out.

When you call, clearly explain your money situation and that you need help to avoid falling behind on your loan. Have info ready like your income, other debts and expenses, and details on your hardship if relevant (job loss, medical bills, etc).

With this info, the lender can look at your situation and give you some options. The earlier you call, the more options they’ll likely have to help.

Loan Changes

One of the main options your lender can offer is to modify your existing loan by changing the terms to make it more affordable.

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Some common loan changes include:

  • Lower interest rate – The lender may lower your rate, even just 1-2%, to reduce your monthly payments.
  • Longer repayment term – You make the same monthly payment but over more months, like 72-84 instead of 60. This lowers the payment but increases total interest paid.
  • Delayed payments – The lender lets you temporarily pause payments for 1-2 months to get back on your feet financially. The missed payments get added to the end of the loan.
  • Interest-only payments – You pay only the interest part of your monthly payment, and the principal payment is delayed to the end of the loan.

To get approved for a loan change, you’ll likely need to show documentation of your hardship. This proves to the lender you’re acting in good faith and the situation is temporary.

Changes aren’t guaranteed, but lenders want to try these before taking back a car. So if you qualify, take advantage of any changes they offer.

Refinancing Your Auto Loan

In some cases, refinancing your auto loan with a new lender may be the best option. Refinancing means taking out a new loan to pay off your existing one.

The key benefit of refinancing is the potential to significantly lower your interest rate and monthly payment. For example, if you got your original auto loan with a credit score of 620 and rate of 15%, but now have a score of 720, you could maybe refinance around 5%.

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Refinancing can also let you extend the repayment term to lower your monthly costs. Just know that will increase the total interest paid over the life of the loan.

Downsides of refinancing include origination fees from the new lender, and the hassle of applying and qualifying for a new loan. Your current lender may also charge a penalty for paying off the loan early.

But if you can lower your rate a lot, refinancing can be worthwhile. Just be sure to compare options from multiple lenders like credit unions, banks, and online lenders.

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Voluntarily Giving Back the Car

If loan changes or refinancing won’t work, voluntarily giving back your vehicle may be a last resort option. This is basically forfeiting the car to the lender.

With voluntary repossession:

  • You avoid the lender forcibly taking the vehicle
  • Fees may be lower than with forced repossession
  • Less damage to your credit than defaulting without surrendering the vehicle

However, your credit score will still take a hit, and any positive equity in the vehicle will be lost. If you have gap insurance, it can help cover the difference between what you owe and the car’s value. But gap insurance still leaves you without a car.

Before choosing voluntary repossession, check the resale value of your car and what you still owe. If you have significant positive equity, it may be better to sell the vehicle yourself and use the money to pay down the loan.

Selling Your Car

If your auto loan balance is less than what you can realistically sell the car for, you may want to consider a private sale. Use resources like Kelley Blue Book to estimate your car’s value based on factors like mileage, condition, and options.

Selling privately almost always gets more money than trading in at a dealership. Have a purchase agreement drafted up to protect both you and the buyer.

Use the sale money to pay off your auto loan first. This releases the lien from the vehicle title so you can sign it over to the new owner. If any sale money is left after paying your lender, you get to keep this equity.

One downside to selling privately is you’ll need to come up with the difference if your loan balance is more than the sale amount. But it gives you control over the process rather than the lender taking the vehicle.

Credit Counseling

If you have debt beyond just the auto loan that’s becoming too much, a reputable credit counseling agency can help. They provide services like:

  • Money management and budgeting help
  • Customized debt management plans
  • Negotiating with creditors for reduced or waived fees and lower interest rates
  • Combining multiple debts into one monthly payment

The counselors are experts in debt relief options and negotiating with creditors. Non-profit agencies provide these services for free or very low cost.

The downside is entering a debt management plan can stay on your credit report for up to 7 years. But for many, it’s a helpful service that helps them become debt-free.


For those with truly overwhelming debts and limited income, bankruptcy may be an option. The two main types are Chapter 7 and Chapter 13 bankruptcy.

Chapter 7 bankruptcy liquidates your assets to pay creditors. With exempt property protected, this can eliminate unsecured debts like credit cards, medical bills, personal loans, etc. Auto loans are harder to eliminate.

Chapter 13 bankruptcy restructures your debts into a 3-5 year repayment plan based on your available income. This can help you catch up on auto loan payments you’ve fallen behind on.

Bankruptcy damages your credit score a lot and remains on your credit report for 7-10 years. But it does provide a relatively quick fresh start if you have no other options.

Filing bankruptcy is a major decision with long-term impacts, so talk to a lawyer and explore all other debt relief options first. But know it is a legal option if you reach that point.

Hardship Assistance Programs

Many top lenders like GM Financial, Ford Motor Credit, Toyota Financial Services, and major banks offer hardship assistance programs. These help borrowers who face temporary money troubles making auto loan payments.

Hardship assistance can include:

  • Letting you delay one or more monthly payments
  • Temporarily making interest-only payments
  • Extending the repayment term
  • Waiving late fees

Each lender has their own eligibility rules, but most require documentation proving your hardship like job loss, illness, or disability income.

Hardship programs let you avoid defaulting on your auto loan when you hit a rough patch. Just know deferred payments or interest get added back to the balance, increasing the total amount you repay.

Budgeting and Lifestyle Changes

For some, the solution is adjusting their budget and lifestyle. This could mean reducing expenses, picking up side work, selling assets, or even moving to lower housing costs.

Make a detailed budget to see where potential cuts can be made to free up more cash for the auto payment. Things like eating out less, limiting entertainment expenses, or temporarily pausing retirement savings contributions.

Boosting income through a second job or side gig is another option. You may need to make some sacrifices in the short term, but this can provide debt relief while keeping your vehicle.

Weigh the Pros and Cons of Each Option

As you can see, you’ve got a number of potential options for getting your auto loan payment back on track. Consider the pros and cons of each as they relate to your specific situation:

  • Loan change – Pro: Makes existing payment more affordable; Con: Not guaranteed approval
  • Refinancing – Pro: Could significantly lower rate; Con: Fees and credit check
  • Voluntary repossession – Pro: Avoids forced repossession; Con: Hurts credit and lose equity
  • Selling the car – Pro: Take control of sale; Con: May owe more than it’s worth
  • Credit counseling – Pro: Experts negotiate with creditors; Con: Can show on credit report
  • Bankruptcy
    • Pro: Eliminates many debts completely
    • Con: Severely damages credit for years
    • Pro: Provides immediate relief from collection calls and lawsuits
    • Con: Legal fees and court costs involved
    • Pro: Allows you to keep certain exempt assets
    • Con: Trustee liquidates non-exempt assets to pay creditors
  • Hardship Programs
    • Pro: Avoid defaulting on your auto loan
    • Con: Deferred payments often get added to balance
    • Pro: No impact to your credit score if you adhere to modified terms
    • Con: Not a long-term solution for unaffordable debt
    • Pro: Lender works directly with you rather than collections agency
    • Con: Each lender has different eligibility criteria
  • Budget Changes
    • Pro: Keep possession of your vehicle
    • Con: Requires sacrifices and discipline
    • Pro: Lets you avoid credit damage from default or repossession
    • Con: If changes aren’t sustainable, you could end up in same situation
    • Pro: Maintain independence and control over your finances
    • Con: Budgeting alone doesn’t reduce amount owed

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