What are the consequences of not paying your car payment? If you’re anywhere from 30-90 days late, your car could get repossessed.
The Federal Reserve Board says over seven 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?
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 means taking on a new loan to pay off the balance on your old one. The advantage of refinancing is to get a lower interest rate, which should reduce your monthly payment. You also could receive a loan extension that stretches out your payments for a longer time.
Unfortunately, the loan extension means you’ll pay more for the car in the long run. Also, you should only refinance if your credit score is at or above the 700 level.
Refinancing takes time. You’ll need to research opportunities with your current lender and compare them to rates and terms you might get from other lenders.
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.
Using Home Equity For Your 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. 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, 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.
Using a HELOC to Pay Off Car Loan
Another option for home owners 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.
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.
If You Can’t Afford Your Car
It’s time to trade it in or sell.
A trade in is only a good option if you have equity, meaning you owe less than what the car is worth. The dealer can take the car off your hands and maybe even leave you with enough cash for a down payment on something more manageable.
Without equity – and very few car owners do have equity — you’re in a tough spot.
If you owe more than what the car is worth than you are “upside down.” If you want to trade your car in, you’ll need to come up with enough cash to cover the difference between the car’s worth and what you owe.
If you want to avoid the embarrassment of being caught off guard by the repo man, return your car to the dealer before they send someone looking for it.
This is called voluntary repossession. It’ll hurt your credit score as badly as a regular repossession, but a credit agent manually going through your report may take into account that you didn’t waste a lender’s time and money by forcing them to chase you all over town to collect on a debt.
What to Do If You Are Leasing
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 paper work. 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.
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 $1,000. Remember, 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.
If Your Car Is Repossessed
While in most states a creditor is allowed onto your property in order to repossess a vehicle, they are restricted from a “breach of peace” meaning they can’t break any locks or chains to get it.
If they have violated a breach of peace, the repossession is reversed. Repo men and women know this, so, don’t expect to catch them slipping.
If you know your car is about to get repossessed, remove all personal belongings and after- market equipment (sub woofers, lights) before this happens.
The lender is going to try and sell your car at auction. These cars rarely sell at full value, so, you’ll be responsible for paying the difference, known as the deficiency balance.
If you’ve managed to scrape up the funds you can buy it back, but your credit score will still reflect a defaulted loan.
What Not to Do
If you’ve been keeping your car in the garage you may legally continue to do so, but the catch is, it is illegal to intentionally hide your car from your creditor. This is considered fraud, which, in any form, is a serious criminal offence.
Hiding your car will bring more trouble than it’s worth. The harder you make him work, the more the repo man will charge the bank, and that final sum will fall on you once he inevitably recovers the vehicle.
While hiding your car in the garage may seem like a good idea at first, it’s only a temporary solution at best.
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.
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.