Can’t Make Car Payment: What You Can Do Now

By Matt DeLorenzo 06/10/2020 5:00pm

There are few things more traumatic than finding out you can’t make a monthly payment. In uncertain economic times, you may face the prospect of withholding a car payment to meet other financial obligations. What then? Here what to do if you can’t make your car payment.

These guidelines will help you to determine your best course of action. Not all will fit your exact needs, but there are pitfalls you can avoid that will ease the financial pain resulting from missed car payments. Of course, the best defense is a good offense, so when shopping for that new or used car, don’t fall for additional features or larger, flashier models that stretch your monthly budget. By buying a vehicle within your means, you may not have to face the prospect of making these difficult decisions. However, if you face the prospect of not paying for your car, the following 10 tips can help.

Determine the value of your car

The Kelley Blue Book Value will help you determine how much equity you have in your vehicle. That amount will play a critical role in your course of action. For those unfortunates who overpay on a new vehicle or choose a model that depreciates quickly, they will find themselves “upside-down” in their loan or lease to where the amount owed exceeds the value.

The severity of that negative equity will play a role in whether you decide to stick with the car and try to repay the loan, work to renegotiate terms, or ultimately look to walk away. For a fortunate few, they may have purchased a vehicle that’s currently in high demand and the amount owed is less than the value. In those cases, these owners have a lot more leverage when it comes time to talk to lenders or car dealers about a course of action.

Change the repayment terms

If you’ve reached the point where you can’t make that next payment, the first thing to do is contact the lender and see if alternative terms can be worked out. This could take the form of payment deferrals or lengthening the repayment period to lower the monthly payments. Check to see if your financial institution has programs designed to help borrowers who are struggling to make payments.

More often than not, you might be offered to skip a month’s payment, especially if you’ve been prompt with your payments. You’ll still owe that amount because it will be added to the back end of your loan. However, don’t expect to take advantage of this break more than once a year, at best.

Pros and cons of car payment deferral

While most payment deferrals have been offers selectively on a once-a-year basis, during the COVID-19 outbreak, many manufacturers are offering deferrals of up to three months on top of three additional months of payment forgiveness. However, most of these programs applied to new or recent purchasers.

To be eligible for payment deferral, owners have to send a hardship letter describing the economic circumstances (job loss or furlough, for example) contributing to your inability to pay. The financial institution will most likely run a credit check and if it allows the deferral will send a forbearance agreement outlining the new terms and repayment. It will also detail any additional fees, penalties, or interest that may accrue under the plan.

The advantage of a payment deferral is that it buys you time to get your finances in order. But remember, the missed (or deferred) payments will be tacked on to the backend of your loan, extending it six months beyond the time you expected the finance period to terminate. Interest will continue to accrue during the extra time the loan is active, for which you will be responsible. The downside is that you will pay more interest over the life of the loan and by the time you pay the car off, it may not be worth as much as it would have under the original, shorter loan agreement.

Refinance the balance

An alternative to seeking payment deferral is negotiating with your lender or another financial institution to refinance the balance. If interest rates have dropped, you might see some savings and by extending the terms over more months, your monthly payment may be lower.

However, another credit check will likely be run during the refinance process and if your rating has declined, expect to pay a higher interest rate as a result. Still, the advantage of taking out a new loan or refinancing the existing one is the possibility of changing the terms through a longer payback period that may make your current car more affordable given your current financial situation.

Sell or trade-in your car

After you’ve determined the Kelley Blue Book Value of your vehicle, you can decide to sell or trade it in. If you’re not able to get a price that covers your loan balance, you will be responsible for that amount out-of-pocket. To maximize the value of your sale, you’ll most likely see the biggest return selling to a private party, however, you have to go through the trouble of advertising and showing the vehicle, as well as negotiating the final sales price. A direct sale to a dealer is more hassle-free but will also net a lower price.

A trade-in might be a slightly more attractive alternative since you can look at getting into a less expensive model. The dealer will also be in a position to roll your negative equity into a new loan. That new vehicle will end up costing you more since you’re also paying for part of your trade. The upside is that you’ll still have transportation and perhaps a new payment that is more in line with your finances.

Look to car payment loan or lease assumption

Say you have a late model car with low mileage. Also, you have an attractive interest rate or lease payment. You may be able to find a party to take over your loan payments or assume your lease. However, check first with your financial institution since not all loans are assumable.

Leases also may or may not be transferred depending on the fine print of the contract. There are third party resources like Swapalease that can arrange to find someone to take over your vehicle and associated payments.

Return or have it repossessed?

Neither of these options is good. Walking away from your vehicle, essentially a voluntary surrender or voluntary repossession is risky. Even though you’ve given the car up, the lender still may seek to collect the remaining loan balance after the value of the car, which is usually sold on the wholesale market or at auction, is deducted. If you walk away from a lease, you may also be liable for the balance of the lease payments as well as early termination charges.

Some may go a more extreme route and default on payments until the lender realizes that they’re just not going to be paid. The financial institution will send out agents to physically repossess the car at a time of their choosing and not yours. Also, you may find that your lender is adding the repossession costs to the amount of money owed.

Whether you walk away from or wait for them to take away your car, either scenario will damage your credit rating. Not only do you run the risk of not being able to borrow again, even if you do improve your credit score, but you’ll also be a risky prospect and will likely pay much higher interest rates as a result.

Seek bankruptcy protection

If your financial situation has deteriorated to the point where you can’t make car, rent, or house payments, you may want to consider seeking bankruptcy protection. By filing for bankruptcy, you are allowed to keep your car while this legal process plays out.

As a last resort, bankruptcy will buy time, but there are ramifications including a damaged credit rating as well as court orders on how and where you can spend your money. Consulting a bankruptcy attorney is recommended before filing.

Keep paying your insurance

While you’re deciding to renegotiate a loan, seeking payment deferrals, or looking to sell or trade-in your vehicle, be sure to keep your insurance payments up to date. Even if you’re not making a car payment, insurance coverage will protect you if anything happens to your vehicle during this period.

If you stop paying insurance or cancel a policy you will out the cost of the vehicle if it’s totaled in an accident or stolen. Also lacking insurance may make it more difficult to get future coverage and most likely will result in you paying a higher rate if you do.

Repairing your credit rating

Once you’ve emerged from your financial difficulties, one of the first things to do is to work towards repairing your credit rating. The first step is making sure you don’t miss any more car payments. The second is managing your debt and keeping up payments on other loans.

Another key is not taking on any new obligations. Don’t apply for new accounts or credits cars that you don’t need. Periodically check your score and also work with the rating firms to correct any errors or update any information regarding changes in income that could help boost your score.