What Can I Do If I Need Help with My Car Payment?

Maybe you've had a massive, negative life change. Or perhaps you're just struggling with personal finances. Whatever the reason, you're afraid of falling behind on your car payments and maybe even defaulting on your loan altogether.

If you find yourself saddled with a monthly car payment that you can no longer afford, don't panic. You have some options.

Be up front with your lender

Communication with your lender is vital and can be the difference between keeping your car and having it repossessed. Don't hesitate; take action immediately to head off a real crisis point. You might find that the lender has an auto loan hardship program and will be able to provide a solution.

"If a consumer isn't able to make their loan payment, they should call their lender right away," says Natalie M. Brown, former vice president of consumer lending communications for Wells Fargo. "Customer service teams are prepared to work with customers to understand their situation and try to find options that can help."

The lender will want to know about the hardship or other circumstances that are preventing you from making payments. If you've had death in the family, a layoff at work, a serious illness, or other major life event that's disrupted your finances, tell your lender.

Some lenders will allow forbearance, a time during which you can miss or make reduced payments until your situation is better. Some banks may even be willing to rearrange the loan terms to a payment that's easier to manage. Keep in mind that lenders don't want your car back and will usually only repossess it when they have exhausted other options.

But after three months of missed payments, and if you do not communicate with your lender, chances are good that a repo truck will be out looking for your car.

With equity: Sell or refinance

Do you have equity in the car? That's the first thing to determine when you're at risk of falling behind in your payments. Use the Edmunds appraisal tool to find out how much your car is worth and compare that value to the amount you owe on the loan. If you owe less than the car's value, you've got equity. If you owe more money on the loan than the car's actual value, you have negative equity. In the loan business, that's called being "upside down."

If you have equity, selling your car directly to a car dealership or CarMax is the easiest way to get out from under a car loan you can no longer handle. You'll pay off your loan and that's that. There will be no danger of hurting your credit because of late or missed car payments. You might even have some money in your pocket toward another car purchase — one with more manageable payments.

Selling the car to a private party would probably net you more money, but selling it to a private buyer when you don't have the title in hand can be tricky. That may make selling to a dealership or CarMax more appealing to those looking for a faster solution.

Even if you need to keep the car, being in an equity position should still allow you to refinance your current loan. Depending on the latest interest rates, you might not be able to find a refinance rate that's lower than your current loan. But by stretching out the loan term through refinancing, you'll get more manageable payments. You'll likely end up paying more in interest, of course, but that is secondary when your goal is to keep your car. 

You might be able to refinance with your current lender, but it may make more sense to look into a credit union or your personal bank. These institutions may be able to offer you lower interest rates than your current lender can.

No equity, there are still some options

It's more challenging if you're buying and don't have equity. If, after getting your car's value, you learn that you owe more than what your vehicle is worth, selling your car to rid yourself of the payment won't be enough. You'd need cash on hand to pay the difference between what you owe and what the car's actual value is.

Refinancing your car might still be an option, but depending on how upside down you are, finding a lender that's willing to carry over a negative amount on a refinanced loan may be a challenge. Contact your bank right away to see if they can help.

Some state, county and municipal governments have credit repair and purchase assistance programs for consumers who need help. If this kind of program is available in your area, it could provide a solution. 

For homeowners, a home equity loan might help alleviate the immediate car-payment problem. If you have enough equity in your residence, a bank or mortgage company could provide enough cash to pay off your vehicle, leaving you with a relatively low-interest loan that you can afford. Of course, as Bankrate points out, one disadvantage of this solution is that you risk losing your home if you default on the loan. 

A personal loan from a friend or family member might be an option, although this comes with some obvious pitfalls, such as potentially souring a good relationship. If you go this route, Experian has a number of suggestions for success, including keeping the transaction as businesslike as possible.

A more drastic solution to avoid losing your car is to file bankruptcy. In a Chapter 7 bankruptcy, a creditor may be prevented from immediately repossessing your car, but it can go to court and appeal. With a Chapter 13 bankruptcy, you present a plan for repayment of debts to the court, and a trustee collects money from you to be distributed to creditors for a period of three to five years. Unless you're in a dire financial situation, in most cases it's better to find a less extreme solution than bankruptcy because that can make loans and credit very hard to come by in the future even if your financial situation is more secure.

Some options if you're leasing

Assuming your lease terms allow it, there are a number of ways to get out of a lease. Edmunds can provide some useful tips for disposing of a car lease cheaply and easily, including transferring your lease to another individual. According to experts, about 80% of auto leases can be transferred with no strings attached. 

Check out peer-to-peer lease exchange sites such as Swapalease and LeaseTrader. The premise is simple: A person who needs to get out of a lease posts the vehicle on the site. If a shopper sees your listed vehicle and likes the terms, that person can take over the lease, provided that the bank allows it and the shopper qualifies. If you can unload your car this way, you're off the hook for future payments.

In case of repossession

If you wake up one day and your car is gone from your driveway, all is still not lost.

Once the car has been repossessed, the lender might allow you to get it back. This is called redeeming or reinstating the repossession. If you are given this option, you'll need to move quickly. The window for getting your car back is short — usually less than two weeks.

Getting your car back won't be cheap, though. Most lenders will require you to pay an amount that brings your loan current (or close to it), along with fees. 

If you're unable to redeem or reinstate your repossession, the lender will eventually send the car to an auction for sale. Your financial attachment to the car won't end there, though. You'll be held responsible for the difference between the amount it sold for and the remainder of the loan — as well as repossession fees.

So, if you owed $15,000 on a car that is sold at auction for $11,000, you'd have a repossession on your credit report and you'd owe $4,000, plus repossession fees, for a vehicle you're no longer driving. While lenders could write off the balance, don't count on it. They are within their rights to sue you for it, and if they win, they can collect the money by accessing your bank account or garnishing your wages. The legal information site Nolo has an article on your options if you owe money after a repossession.

A poor solution: Handing the car back

If a tow truck takes your car, that's considered a repossession. If you arrange to drop off the vehicle with the lender, that's called a voluntary surrender.

If you opt to voluntarily surrender your car, you'll be spared the costs the bank incurs for sending out the tow truck and storing your car until it is sent to auction. But lenders see repossession and voluntary surrender as essentially the same thing: a failure to live up to your side of the loan agreement. Although they will show up differently on your credit report, both will negatively affect your credit score.

No solution at all: Hiding the car

This is not going to work. Here's a story to prove the point:

"I sold cars for more than a dozen years in Southern California," says automotive journalist Matt Jones, "and one customer was a woman who didn't even make her first month's payment. She also didn't respond to the lender's attempts to reach her.

"She was deemed a 'first payment default' by the bank, which marked her vehicle for repossession. She likely thought getting the car away from her home address would make her invisible to the bank, so she decided to skip town. Within a month, a repo company spotted her Mitsubishi Montero in a supermarket parking lot in Atlanta and repossessed it.

"How did that happen? Technology. Repo trucks have cameras that read license plates and photograph nearly every one that passes their way. Those plates are cross-referenced with lists of cars that have been marked for repossession, and when the driver of a roving repo truck gets a match, the vehicle becomes a target."

Moral of the story: Even driving across the country will not help you outrun the repo man.

The best advice

The best way to deal with the can't-pay dilemma isn't a strategy for ducking the repo truck or even knowing how to rearrange the terms of your loan. It's the actions you take before you buy your car that may be the most valuable way to head off trouble.

"The first tip we would have for consumers is to try to avoid the situation entirely — if they can," Brown said. "Plan ahead to minimize the impact a hardship might have on making loan payments. For example, having an emergency fund with at least three to six months' worth of expenses is a good idea."

Here are a couple more proactive measures: Buy the right car for your needs, recognizing that it might not be the car of your dreams. Factor in the extra costs of car ownership ahead of time. Stay well within your budget instead of pushing it to the max.

If you do all that but still find yourself in a sticky financial situation with your car, we hope these tips — and a little luck — will help save the day.