Maybe your personal finances have just tanked, or maybe you're frightened that they soon could. Whatever the reason — layoff, stock market, 401(k) losses — you now find yourself saddled with a monthly car payment you can't afford. Your ride is fast becoming a 2-ton albatross. What can you do?
We're hearing that question a lot lately from Edmunds readers who want someone to take over their car payment or improve the terms of their car loan. So we contacted Pawan Murthy, director of partnerships and business development at Alphera Financial Services, to get the view from the lender side of the desk. He addressed our readers' top questions, and we added some thoughts of our own.
What should I do if I can't make my car payment? Alphera: You should immediately contact your lender. A lender will do whatever they can to keep you as a customer. Edmunds: Many people don't realize that it's far better to work with the lenders than to avoid them. Ask the lender what you owe on the car (the payoff amount) and compare it to the car's True Market Value®®. Depending on how many payments you've already made on the car, the TMV may be higher than what you owe, in which case you can sell the car to pay off the loan.
What do lenders usually tell people when they call and say they can't make the payments and can't refinance? Alphera: Lenders want to know the reason you cannot pay — and would like specific details as to your financial situation. This way the lender can provide the appropriate assistance to your needs.
Does a lender have anything to offer, like spreading the loan payments out over a longer time to avoid default? Alphera: Depending on your payment history, the reasons why you cannot pay, your credit score or other factors, a lender may allow you to defer your payment by 30 days. The lender may also offer to refinance your existing loan. Depending on the rates available at the time, you may actually lower your interest rate if you refinance. Edmunds: You could also opt for a higher interest rate on a loan that is spread over a longer period of time. This would still result in lower monthly payments overall. You don't have to refinance your loan with your original lender; you can also go to Bankrate.com to shop your loan. (See "Refinancing Your Car Loan.")
Can I transfer the title to someone else before the loan is paid off, and if so, how? Alphera: The transfer of title will require you to sell the vehicle, which means your existing loan must be paid off completely. This can be done by the money from the new buyer or from a combination of the new buyer's money and yours. Edmunds: The new buyer would have to qualify for financing as well. Logistics of vehicle transfer depend on the lender and the deal you make.
Is selling the car on Auto Trader better than letting the lender repossess it? Alphera: Absolutely. Selling your car through any method (online, newspaper, dealership, etc.) is the preferred solution as long as you can pay off the loan entirely. Edmunds: Many people are "upside-down" on their cars — they've got negative equity, also known as owing more on the car than the car is worth — which means they'll have to find the extra money if they want to pay off their car loan and get out from under monthly payments. Sometimes this may mean borrowing from friends or family. Although it's been done before, rolling negative equity over into the purchase of a new car is a terrible idea — it got many buyers in deep trouble, and it's far more difficult to do now that credit terms have tightened.
If I don't make payments on the car, what will the lender do and when? Alphera: How a lender handles a customer who cannot make payments (also known as a customer in "default") depends on the customer's payment history and the policies of that financial institution. A customer in default should expect to be contacted by the lender via phone call or letter within 30 days of non-payment.
When would the car be repossessed? Alphera: The time frame for your vehicle to be repossessed is dependent on your payment history, reason for non-payment and the policy of the lender. This is why it is very important to be up front with the lender — telling them why you can't make your payments. If you are between 120 and 180 days late on payments, most lenders will "charge off" your account — which means the lender determines your loan is a "loss" — regardless if the vehicle is repossessed or not.
Will I still owe money on the car if it's repossessed? Alphera: If the vehicle is repossessed and your account is "charged off," the lender will sell the vehicle at auction. If the vehicle sells, you would be required to pay the difference between the amount the vehicle was sold for at auction and the remaining balance on your loan. Edmunds: If a vehicle sells at auction, the remaining balance on your loan will be significant, and it means you'll be paying for a car you no longer have.
What does repossession do to my credit? Alphera: Lenders constantly report your payment history to the credit bureaus — such as how many times you were 30, 60, or 90 days late on payment — which will lower your credit score. However, having your vehicle repossessed or if your account was "charged off" with a balance remaining will severely tarnish your credit. A poor credit history and low credit score will result, making it very difficult to obtain any loan (be it a home, boat or another car) in the future. Edmunds: Having bad credit can impact anything from your next car purchase to your next job. If your situation has gotten to the point where repossession is needed, there is something you can do to soften the blow...
What if I voluntarily surrender my vehicle? Alphera: Some customers who cannot make their payments decide to voluntarily surrender their vehicle to the lender. This is known as a "voluntary repossession" and it adversely affects your credit score and history like a standard repossession. You will still owe the lender the difference between the remaining balance of the loan and selling price of your car at auction, but you won't be charged for the expenses incurred in the physical repossession of your vehicle.
Edmunds: Avoid letting your car be involuntarily repossessed at all costs. As difficult as it sounds, the best choice for car owners who are having trouble keeping up with their payments may be to call the lender, be honest and ask — politely — for help.