Many people need a car to get to work, school, and other daily activities. If you are having trouble paying your loan payments on time, there may be a way to get the loan paid off.
There are several options available to you, such as selling your vehicle, working with an existing lender, or refinancing your auto loan. It’s important that you understand the differences between each option and how they can impact your credit score.
How do car loans work?
A car loan is an installment loan that you can use to buy a vehicle. If you fail to make your monthly payments, the lender may repossess your car to recover the loan amount.
Car loans are installment loans. The borrower pays equal monthly payments until the loan is fully paid. The average car loan repayment term is between 12 and 84 months. However, new cars can be paid off in as little as 72 months while used cars take out loans for 65 months.
The interest rate on a car loan is determined by your income, credit score and other factors. It will be the same for the life of the loan. To reach a zero balance at your end of the repayment period, the lender calculates the monthly principal and interest payments you will have to make to purchase a car. You may be able to lower the interest rate and pay less.
There are many places you can obtain a car loan. The most popular sources for car loans are banks, credit unions, and vehicle manufacturers. Although you may be able to get financing from the dealer (“buy here, Pay here”), it is not always a good option. You can sometimes apply directly to a lender for financing, while in other cases your lender might arrange financing.
What to do if you can’t afford your car loan payments
It’s crucial to evaluate your budget before you start the financing process. This will ensure that you are able to afford the vehicle you want to buy. You may find it difficult to keep track of your finances, as financial circumstances can change.
- Sell the car
Although it is not ideal to get rid of your vehicle, if you don’t adhere to your repayment plan, the vehicle could be lost. You can take control of the sale and may even be able to make a down payment for a lower-priced car by selling it.
You can also visit a dealership to see if your car can be traded in for part of the purchase price. Keep in mind, however, that a trade-in will usually net you less than selling your car privately.
- Talk to your Lender
It may not be possible to get out of your car loan depending on your financial situation. Talk to your lender about your situation to see if they can help you negotiate.
If your financial difficulties are temporary, your lender may be able negotiate a forbearance. This temporarily suspends your payments. You may be able to negotiate a modification to your monthly payments to make them more affordable until your finances are in order.
Every lender has its own policy for individuals experiencing financial hardship. Talk to your lender to learn more.
- Refinance your Auto Loan
There are a few ways that refinancing your car loan could help. You may be eligible for a lower interest rate if your credit has improved or the market rates have fallen. This will reduce your monthly payment.
You may also be able refinance to a loan with a longer term. The cost of your monthly payments will be lower if you spread them out over a longer time period. However, the loan’s life will see you pay more.
To make the most of your finances, it’s important to compare interest rates when refinancing an auto loan. Consider the cost of the new loan, the government paperwork, and any prepayment fees that may be associated with your current loan if you pay it off early.
- Voluntarily surrender the vehicle
Lenders may decide to repossess your car if you have defaulted on an auto loan. This is a difficult process that can damage your credit score and cause you to be in default on your auto loan. You can surrender your vehicle to your lender if you are unable to avoid repossession.
You can return the vehicle to your lender at your own terms by voluntary surrendering. While it may have a negative impact on your credit score, it will not have as much of an impact as repossession. You will also be able avoid repossession-related fees that lenders might add to your owings. Contact your lender if you feel that this is the only way to avoid a repossession.
What will the impact of a car loan on my credit score?
The way you get out of a car loans can impact your credit depends on the route you take.
You can sell the car. If you pay the entire loan off, it will not have any impact on your credit score. However, if your loan is replaced with a lower-priced car, it may temporarily lower credit scores.
Negotiating with your lender. It will impact your credit score depending on the outcome of your negotiations. It may report that you are not making the payments on the modified repayment plan. This could affect your credit score and how future lenders see you.
Refinance your auto loan: Just like replacing your vehicle with a newer one, the refinance of your car loan will have an impact on your credit score when you apply for it. If it does, however, most cases will not affect your credit score by more than five points.
Voluntarily giving up the vehicle: You won’t have any other option but to surrender your vehicle. This will cause damage to your credit score. You’re likely to have missed payments by the time this happens, which could damage your credit history and threaten you with repossession. Lenders may be more comfortable if you give up your car than waiting for them to seize it.
How to Avoid Going Downside Down with a Car Loan?
When you owe more on your car loan than it is worth, you are considered upside-down. This is also known as being underwater or having negative equity.
You may have to pay the lender if you are in default on your car loan. This will cover the difference between the car’s current value and the remaining loan amount. This payment could make things worse if you are already having trouble paying your bills.
If you are already underwater on your car loan, there may not be anything you can do. Here are some ways to avoid it.
A large down payment is necessary. Cars depreciate over time. New cars tend to appreciate quickly in the first year. Your vehicle may depreciate quicker than you can pay the loan down if you don’t put down a minimum amount. Negative equity can be prevented by making a bigger down payment.
Choose a shorter repayment period. While a longer term on an auto loan can make monthly payments less expensive, it can also have unintended consequences if you aren’t careful. A longer repayment term can mean that you pay down your loan faster, even if you have put down money. This could make it easier to depreciate your repayments.