What To Do If You Can’t Pay Your Car Payment

If you’ve fallen behind on your car payments, chances are other bills are stacking up. Finding the best option to eliminate your debt now will save you a lot of money down the road.

What are the consequences of not making your car payment? If you’re 30-90 days late, your car could get repossessed.

The Federal Reserve Board says nearly 8 million Americans are three months behind on their auto loans, and that should be a warning sign for working class consumers and those with a low income, especially if you’re in the 25-35 age bracket.

If you’re struggling to make a car payment, you have options.

How to Keep Your Car When You Can’t Make Payments

It may not seem like it, but you probably have a couple of smart ways to get through a situation when you can’t make your car payment. And some of those ways involve talking to your lender. You simply ask about hardship options.

Among the options you could have to solve your late payment problems are:

• Hardship deferral: call your lender and ask about any hardship assistance programs you may qualify for. Financial hardship assistance is an umbrella term for options like refinancing, forbearance and deferral. The lender may allow you to skip a payment and add it to the end of the loan or refinance your loan all together.
• Loan modification: A loan modification is an adjustment to one or more of your current loan’s terms, such as the duration of the loan, the interest rate, and the payment schedule.
• Loan refinance: Refinancing allows you to lower your payments, either by extending the term of the loan, getting a lower interest rate or, ideally, both. In a refinance, you replace your current loan with a new one. To qualify for a re-fi, you must have good credit and a stable income.
• Payment extensions: Some lenders permit you to skip one or more payments with the provision that they get added to the back end of your loan. In short, your loan term gets longer. Often to qualify for these extensions, you must show your lender that your financial difficulties are temporary, such as the loss of a job or a short-term health issue.

If your financial situation has become drastic, you could save your car from repossession by filing for Chapter 13 bankruptcy and making the car part of the repayment plan you present the court. If you file for Chapter 7 bankruptcy, the creditor is prevented from repossessing the car, but could go to court and receive an order that permits repossession.

Refinance Your Car Loan

Refinancing makes the most sense if you have a 700 or higher credit score. Refinancing replaces your current loan with a new loan, usually from a different lender. The new lender pays off the old loan and takes over the car’s title until you’ve paid it off.

With a longer term on the new load – for instance, if you had 24 months left on your original loan and you extended that to 36 months – your monthly payments will be lower (assuming the same interest rate or lower).

Although this new loan is more affordable monthly, it does carry a cost: You shell out more money for car over the duration of the loan term. You can cut that increased cost if you secure a lower interest rate.

Refinancing could drop your credit scores slightly, but not as badly as missing payments or defaulting on the loan.

Refinancing is not recommended if:

• You have bad credit: That’s because you probably won’t qualify for a better interest rate than you already have.
• You’re upside down on your car loan: This is the case with an increasing number of car owners. You will find a difficult time securing a new loan, and you’re probably going to get the same (or even a higher) interest rate on the new loan.

Ask Your Lender About Financial Support Options

It should be obvious that you don’t want to default on your car loan. Do you know who else doesn’t want you to default? Your lender.

Lenders often help if you’re hit with a financial downturn. That was particularly true during the recent pandemic. So, ask your lender about any hardship programs it has. They can include loan deferrals and late-fee waivers.

Some lenders agree to loan deferrals (or loan extensions). This is when the lender allows you to delay your next one or two payments before resuming the normal payment schedule. If you get a two-month deferral, your loan term will extend by two months. Interest will accrue while your payments are deferred, so you’ll pay a little in the long run when the loan term ends. However, a deferral shouldn’t hurt your credit score.

Deferrals are different than forbearance, although people often use the terms interchangeably. Forbearance is a more blanket term, and it signifies a lender’s willingness to let you temporarily stop your payments or to allow you to pay less per month for a little while.

A late-fee waiver is when a lender agrees not to collect a late fee when you make a payment within 30 days of its due date. This hardship help shouldn’t affect your credit score, either.

There are two important things to understand about hardship helps. First, these aren’t long-term solutions. They’re just smart tactics to get you through a tough time.

Second, you should talk to you lender before you intentionally miss any payment. You’re their customer, and they want to keep you. They want you to make more payments, so they’ll work with you to make that happen, even if payments are delayed.

Using Home Equity and HELOC to Pay Car Loan

If you own a home, you may consider using a home equity loan to make your car payment.

Banks, credit unions and online lenders offer home equity loans at a fixed rate that, depending on your credit score, might beat the interest rate you can pay on an auto loan. The tradeoff – and it’s a big one – is that you pledge your home as collateral and receive a loan (i.e. second mortgage) that usually amounts to as much as 80% of the equity in your home.

If, for example, if you have $40,000 of home equity, you will qualify to borrow $32,000 (40,000 x .80), which should be enough for you to pay off any car loan (and possibly other debts, such as credit cards).

The benefits of a home equity loan are:

• The debt consolidation aspect, which allows you to put all your debt into one, so you can make only one monthly payment.
• It’s tax deductible. Unlike most other loans, when you do your taxes, you can claim the interest you pay on a home equity loan, just as you would on your mortgage.
• Interest rates on home equity loans are usually lower than other non-secured loans, like credit cards, but may not be lower than your auto loan.

The downside is you’ll be putting all your eggs into one precious basket. If you fall behind on your home equity loan payments, the bank has the right to foreclose on your home. Before you take such a high risk, you should ask yourself if the potential downside of this option is worth it.

Another option for homeowners is a HELOC or home equity line of credit, which is open-ended, like a credit card. You can use any amount you need, up to your equity limit. Using the same example as above, the limit would be $32,000.

Lines of credit usually offer variable interest rates that are lower than home equity loans, at least for the first year. You will only be responsible for repaying the interest of the amount you used. So, if you only used $10,000 out of the $32,000 you had available, then you only will pay interest on that $10,000.

» Learn More: Can I Make a Car Payment with a Credit Card?

Ways to Increase Income When You Can’t Make Your Car Payment

One of the best ways to afford your car payment is to pick up extra work and earn a bit more money. The post-pandemic economy has added many more gig jobs, making remote work and part-time work more accessible.

Combined with shedding monthly services you might not need and selling possessions that you no longer use, you can find your way to extra money more quickly.

Here’s a list of ways you might consider making more money:

• Get thrifty: Sell items like old electronics or clothes online through eBay, Amazon or Craigslist.
• Cut the cord and the stream: If you still pay for cable TV, that’s an easy one to cut and save $100 or more a month.
• Canceling streaming subscriptions: Spotify, Netflix and Amazon: Individually, they seem affordable, but these three together cost about $36 a month, or $432 a year.
• Ask for overtime: Although they don’t always advertise or ask out loud, some employers are willing to pay overtime to current employees to get more work done. It can involve working more days of the week or working more hours in the day. Ask your human resources department if there are any OT opportunities in your company.
• Find seasonal or short-term opportunities: All kinds of businesses need short-term help, often during busy seasons. Extra help during the holidays is common. Many tourist areas have businesses that need more staff during spring break or over the summer. Find the high season where you live and take advantage of it.
• Look for warehouse or big-box jobs: Amazon and large retailers like Walmart have been building warehouses across the country to help move products from their stores to customers (and to get them returned). Keep an eye out for these warehouse positions.
• Drive for Uber or Lyft: Uber drivers make around $8.55 an hour. It’s not much, but it’s in your best interest to do whatever you can to keep up with your car payments.
• Food delivery: DoorDash, Grubhub and Uber Eats are the most popular food-delivery sites these days. You pick up food that is already paid for at a restaurant, then deliver it to someone’s doorstep.
• Non-driving service work: You can also make performing outside service work as a third party, such as working for Instacart as a grocery shopper, TaskRabbit (getting gigs as an online handyman) or Instawork (providing staff work, such as answering phones or as an office assistant).
• Freelance work: Do you have any skills that you can shop out to friends? If you know your way under a hood, offer to fix up cars or do oil changes. If you can paint, offer friends and family a living room renovation. Make your skills work for you.
• Part-time jobs: Apply for a part-time job delivering pizza’s or working retail. The hours will likely be short and flexible, so they won’t interfere with your day job.

If cash flow is one of your problems, consider asking for an advance on your paycheck. This can mean a trip to HR and possibly a formal request on paper, but it might solve a short-term issue.

Options if You Can’t Afford Your Car Anymore?

Here’s a direct question: How much do you really need your car? Asked another way: Is the cost of your car, plus gas, plus auto insurance, more per month (or year) than it would cost to use public transportation or Uber?

If the answer to these questions is no, then getting rid of your car might be the way to go. If so, the best option is to sell it, especially if the car is worth more than you owe on your loan.

Selling your car gets you out from under the monthly payments, and you can use the cash left over from the sale to get a cheaper vehicle. Selling a car on your own typically makes you the most money, but you won’t be able to do that when you still owe money on the vehicle. You can look for car dealers that don’t require a trade-in to buy a car, such as Carmax.

As you investigate your car-selling options, check on your equity. Do you owe more money on your loan than what the car is worth? This is called negative equity. It’s becoming an increasingly common situation as car dealers have loaned money to car buyers under longer-term loans, up to eight and 10 years in some cases. Not all new cars hold their loan value over eight and 10 years.

If you have negative equity in your vehicle, you’ll still have to pay what you owe your lender. That might involve another loan. Since that loan will be for the amount left on your loan rather than the original price of the car, your payments should be lower.

If you’re going to have to come up with money to pay off the car, then investigate whether you have an assumable car loan. If so, you may be able to find someone willing to take your car – and your monthly payment – off your hands. The transaction may only cost an administrative fee. However, not all lenders permit a third party to assume your loan.

Also, transferring your loan to someone else could affect your credit score negatively. If so, it should only be a short-term decline.

You can also call your lender and inform them you can no longer make payments on your loan. This is called a voluntary repossession, and the lender takes your vehicle and sells it. If they can’t sell the car for enough money to pay off the loan, you still owe the difference, plus any late fees.

However, you won’t be hit with the fees that hit those who have their cars involuntarily repossessed. Voluntary repossessions stay on your credit report up to seven years.

Lease Takeovers

Find somebody to take on your lease. Websites like leasetrader.com and swapalease.com make this straightforward. Find a willing trader and fill out the paperwork. Talk to your lender to make sure the trade is doable and that there are no extenuating fees. Once this is all done, hand over the keys.

It sounds easy, but it’s not always a fast process. The new lease holder will have to pass a credit check. Also, the vehicle may have to undergo an inspection to verify its mileage and condition. You can also expect a newly detailed Carfax report to get generated.

However, some lease companies won’t permit you to transfer the entirety of your lease. In those cases, you would retain some of the liability for the car even though someone else is making lease payments. Also, some lease companies won’t let you transfer a lease at all.

If you can transfer your lease, prepare your buyer for added costs. Some states tax a lease transfer as if it were a sale. The new lessee typically pays those costs. The lease company may also have lease transfer fees. You might have to negotiate with the new lessee about who pays those.

Affordable Transportation Alternatives

If you surrender your vehicle, odds are you going to need new transportation to get around town. That could come in several forms.

Transportation alternatives include:

• A used car: Look for something $5,000 or less, and research insurance costs before you buy. Some cars (and car brands) are less expensive to insure than others. Also, you will need emergency funds to keep up the maintenance.
• Public transportation: The larger your city, the better your options – train, bus, trolley.
• A bike or moped: Bike-sharing systems are becoming ubiquitous in larger cities. Prices are low, but you will need a credit card.
• Uber, Lyft or taxi: Cost is a consideration here. If you need to travel many miles every day for work or school, you could run up a credit card quickly with this option.
• Ride-sharing: You can use Uber, Lyft, taxis, limousines and other ride service providers to share your trip and cut trip costs. Ride-sharing companies have increased their market share as more young Americans embrace it as a transportation option.
• On-demand car-sharing services: Zipcar and Turo are excellent for short trips, and you can rent cars by the hour or the day.

As you evaluate your options, be holistic. Think about all the potential costs that could eat into your wallet or pocketbook. If you buy a used vehicle and continue to drive yourself, consider route adjustments that don’t include tolls.

And weigh actual costs. For instance, a regional monthly public transportation pass in Dallas, which covers trains, light rail lines and buses, costs $192 a month. That’s significantly less than many of today’s car payments plus gas and insurance.

Understanding Car Repossession and How to Avoid It

The last thing you want to happen if you’re struggling to make you car payment is for your lender to repossess the vehicle. Getting your car repossessed is stressful, embarrassing and a major hassle. If it happens, it will sit on your credit report for seven years, hindering your ability to borrow money throughout that time.

If you know it’s about to happen and have chosen not to do a voluntary repossession, remove your personal belongings and after-market equipment such as subwoofers and lights before this happens.

In some states, such as Alaska, Arkansas, Illinois and others, the lien holder can repossess a car after only one missed payment. Other states build in a 10-day grace period, while others bake in more time to get current on your loan. Still other states, like California, have a formal owner notification process in place before a lender can recapture a car.

The good news is that your lender really doesn’t want to own your car. It much prefers you make a payment. That means lenders often give car owners two to three months of missed payments before they state the repo process.

But if you do get your car repossessed, the lender will sell your car at auction. If the sale doesn’t bring what you owe, you’re on the hook for the money difference between the sale prices and your loan balance. You can probably negotiate a payment schedule to get your balance cleared. You also might be able to negotiate a settlement of less than the full amount.

You may be tempted to hide your car from your creditors to avoid this. Bad idea. It’s illegal – fraud, to be more precise – and the harder you make the repo man work, the more he charges the bank, costs that will be passed on to you.

If you experience a car repo, you can take steps to rebuild your credit – even while the repossession is part of your credit report. First, minimize your overall credit use. Second, make any credit payments on time. Also, only apply for (and use) credit cards that you need. The goal is to fly below the radar but fly safe.

Steps to Take Immediately If You Can’t Make a Car Payment

If you can’t make your car payment – and especially if you’ve already missed a payment – you must create a plan to minimize the financial damage ahead.

Here are immediate steps to consider when your car payment is in danger:

• Call your lender (hopefully before you miss a payment): Keeping your lien holder up to speed on your situation may seem counterintuitive, but it can help you in the long run. Your lender may have hardship programs for you to consider.
• Analyze your monthly income and expenses: Look for places where you can trim costs and think about ways to generate more money each month. Be brutal. With luck, this will just be temporary.
• Call about favors from friends or family: You can ask for a short-term loan (or a one-time gift). You can also use your loved ones as a resource: they may know about a cheaper car or else work opportunities to help you get ahead of your bills. They may also be able to help you with rides to work or to the store if you must surrender your vehicle.
• Get debt counseling: Connect with a nonprofit credit counseling agency and let it evaluate your income and expenses to see if it can help you create a more affordable budget. Agency representatives provide credit counseling, and they’re liable to find savings available in areas you haven’t considered. They also have suggestions on ways to pay your other debts to free up more money to go to your car loan. What’s important to remember about these agencies is this: all their advice and budget assistance is free. Take advantage of it.
• Explore refinancing: Reach out to potential lenders, including at least one local credit union, to ask about terms for a new loan.

Once you’ve exhausted these resources, then it may be time to look at long-term solutions we’ve discussed, such as selling your car.

Not being able to make your car payment isn’t a devastating development, but it could be if you don’t handle it smartly. In any event, you must act. The earlier you do, the better you will be financially. Your car payment problem won’t disappear if you try to wait it out.