April 10, 2023
Essential tasks like getting to work and making appointments can be difficult to accomplish without a vehicle, but defaulting on your car loan and the resulting in repossession could put you in that uncomfortable position.
Some loan agreements label you in default after just one missed loan payment, but usually the repossession process doesn’t begin until several payments have been missed.
If your financial situation is making it difficult to keep up with payments, you take action sooner than later. To reduce your risk of repossession, financial experts offer these six recommendations:
Ensure Payments Are Affordable from the Start
What’s the number one way to avoid getting your vehicle repossessed? Establish affordable loan payments upfront with your lender. Loans are not always designed to be affordable for an applicant’s budget. When you apply, lenders look at your DTI, or debt-to-income ratio. This takes into account your monthly income and monthly debt payments, like your rent or mortgage, credit card payments and student loans.
The DTI does not take into account other expenses like childcare costs, medical bills and other high recurring expenditures. This makes it important to review your full budget in-depth and understand what’s actually affordable for you and set that expectation for your loan.
Prioritize Payment Catch-up
If you’ve already missed a payment (or a few), you’re moving closer to a car repossession. Catching up on payments is the most important step at this point to take your loan out of default and prevent repossession.
To do this, you must pay all outstanding payments — as well as late fees — and any other outstanding fees. Many people who fall behind on their auto loan payments are struggling financially, so this is not always feasible, but if there are ways to divert funds from other areas of your budget to make progress on car payments, those efforts could go a long way with your lender.
Refinance Your Auto Loan
If your financial situation has changed, you may no longer be able to meet the payments that you originally set up. For example, you may now have extra expenses or you may have switched to a lower-paying job. By refinancing your loan, you could set up more affordable loan payments.
This may be done by resetting the term or choosing a lower term. If you have paid down your existing loan, your new loan will have a lower initial balance. This can result in lower payments as well. Refinancing your current loan also enables you to keep equity and to avoid additional credit damage.
Communicate with Your Lender
As soon as you know that you are unable to make a car loan payment on time, you should reach out to your lender. Some lenders may allow you to make up a missed payment by extending your term length by a month. Others may waive the late fee or work with you in other ways to address financial issues you have. And it may go without saying, but the best time to alert your lender of a problem is before you miss that first payment. Not only does this give them time to find solutions for you, but it may prevent a ding to your credit as well.
Modify Your Loan
A loan modification will adjust some of your current loan terms without the need to refinance. For example, the lender may extend your loan term or offer a lower interest rate. Modifying the loan will help you avoid missing additional payments by setting up lower monthly payments.
Be aware, however, that a loan modification can hurt your credit score depending on what features are changed. With this in mind, refinancing the loan before your first missed payment is the ideal route to go (if you can qualify).
Sell the Vehicle
In some cases, lower payments from a loan modification or a refinance will still not be affordable given your financial situation. This means that owning your vehicle is no longer a viable option.
By selling your vehicle, you obviously avoid an auto loan repossession and can avoid damaged credit in the process. What’s more, if you have equity in the vehicle, that equity may be used as a down payment on a more affordable vehicle.
Qualifying for a new car loan is more challenging if you have already fallen behind on your current loan payments. With this in mind, the best time to sell a vehicle that you know you can no longer afford is before skipping the first payment.
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