Help! I Can’t Pay My Car Payment

If you’ve fallen behind on your car payments, chances are other bills are stacking up as well. Taking the time to explore your options for eliminating 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 anywhere from 30-90 days late, your car could get repossessed.

The Federal Reserve Board says almost 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 are struggling to make a car payment, you have options.

What Can You Do to Keep Your Car?

First, 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.

Refinancing allows you to lower your payments, either by extending the term of the loan, getting a lower interest rate or, ideally, both.

But these aren’t the only options. If you’re a homeowner, it could pay to use the equity in your home to turn your car loan into something with a better interest rate. You might also look at ways to boost your income to make your car more affordable.

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

If your credit score is 700 or higher, consider refinancing. Simply explained, refinancing means replacing your current loan with a new one, 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.

By extending the term of the loan – 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. But beware: You’ll ultimately pay more for the car before the loan is paid off. If you’re able to get a lower interest rate, the total cost will still probably increase, though not as much.

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

This method isn’t as beneficial if you have bad credit because you won’t qualify for better rates. Additionally, you’ll find it difficult to convince a lender to refinance if you are upside down on your car loan.

Ask Your Lender About Financial Support Options

Obviously, you don’t want to default on your payments. Do you know who else doesn’t want you defaulting? Your lender.

As a result, lenders are typically willing provide some help if you’re going through a financial downturn. That was particularly true during the COVID pandemic. So, ask your lender about hardship programs, which include loan deferrals and late-fee waivers.

Deferrals (or loan extensions) are 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. The interest will keep accruing while your payments are being deferred, so you’ll pay more before the loan ends. However, it shouldn’t hurt your credit score.

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

These aren’t long-term solutions, but if you’ve had a brief financial setback, they can help you through a tough time.

Using Home Equity and HELOC to Pay Car Loan

If you own a home, you may want to look into a home equity loan.

Home equity loans are offered by banks, credit unions and online lenders, at a fixed rate that, depending on your credit score, might beat the interest rate you currently pay on your car loan. You pledge your home as collateral and receive a loan (i.e. second mortgage) that usually amounts to 80% of the equity in your home.

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

The benefits of a home equity loan are:

• Consolidate your debts into one monthly payment.
• 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 very precious basket. If you fall behind on your home equity loan payments, the bank has the right to foreclose on your home.

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?

Find Another Source of Income

If you have time, there are plenty of avenues to make money. A fairly quick, and sometimes very profitable way, is to sell stuff online. Do you have any electronics you barely use? There’s not much you can do on your iPad you can’t do on your cellphone. Sell the iPad.

Here’s a list of ways you might consider making some quick cash:

• 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 a month on. Cancelling streaming subscriptions like Spotify, Netflix and Amazon: Individually, they seem affordable, but these three together cost about $36 a month, or $432 a year.
• 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.
• 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.

What Can You Do if You Need to Get Rid of Your Car

Do you really need that car? With the increase in remote work due to pandemic restrictions, many people no longer make a daily commute to the office. Or, perhaps, public transportation or other options can get you where you need to go. Even if this isn’t the case for you, if you can’t afford your vehicle, getting rid of it might be the way to go.

The best option, of course, is to sell it, especially if the car is worth more than you owe on your loan. You’ll be out from under the monthly payments, and you can use the cash left over from the sale to get a cheaper vehicle. If you owe more than what the car is worth, 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.

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 it for enough to pay off the loan, you still owe the difference, plus any late fees you incurred. 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

Try to find somebody willing to take on your lease. Websites like leasetrader.com make this pretty straight forward. 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.

Use Other Transportation Options

You’ll still need a way to get around. If four wheels are something you feel you cannot do without, consider a used car. Look for something around $3,000-$5,000Remember, you’ll still need money for insurance and an emergency fund for the inevitable repairs.

If you live in a large city, public transit should be an option. If not, consider a bike or moped. Uber may be an option depending on how far you live from work and how often you need to commute. Bike-sharing systems are becoming ubiquitous in larger cities.  There are ways to get around if you are willing and resourceful.

Repossession and Avoiding Legal Trouble

Getting your car repossessed is stressful and embarrassing. 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.

The lender will sell your car at auction, and if the sale doesn’t bring what you owe, you’re on the hook for the difference.

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.

Take Action As Soon As Possible

Don’t be afraid to call on favors from friends or family. Don’t be afraid to drive a beater, if that’s all you can afford. Take the bus. Buy a bicycle.

Do something!

The earlier you act the better, the point is to stay ahead of the “crisis.” This problem won’t just disappear if you wait long enough. Be proactive, some shrewd financial planning and a little foresight goes a long way.

It may pay off to call a nonprofit credit counseling agency and let them look at your income and expenses to see if they can help create aa more affordable budget. They might find savings available in areas you hadn’t considered.

They also have suggestions on ways to pay other debts that would clear more money to go for your car loan. And best of all, their advice and budgeting help is FREE! Take advantage.