Maybe you've had a massive (and negative) life change. Perhaps your personal finances have just tanked. Whatever the reason, you're afraid of falling behind in your car payments and maybe even defaulting altogether. If that's the case, you're not alone. More people are defaulting on their car loans than at any point since 2010.
If you find yourself saddled with a monthly car payment that you can no longer afford, don't panic. Ask yourself the following questions before you miss any payments, and depending on your answers, we can tell you how to proceed.
Do You Have Equity or Are You Upside Down?
If you're making payments on a car that you can no longer afford, the first thing to do is determine if you have equity in the car or not. Use Edmunds' tools to find your car's value 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 car 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 your credit taking a hit because of late or missed car payments. You might even have some money in your pocket toward another car purchase — one with more more manageable payments.
Selling the car to a private party would net you more money, but selling to a private buyer when you don't have the title in hand can be tricky. So it's best to deal with a dealership or CarMax.
If you need to keep the car, being in an equity position should allow you to refinance your current loan. With luck, you'll get more manageable payments, typically by stretching out the length of the loan. You'll likely end up paying more in interest, 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.
If You Don't Have Equity
This is a little more challenging. If, after using Edmunds' tools to assess 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 will be more difficult: You'd need cash on hand to pay the difference between what you owe and the car's actual cash value.
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.
If you're leasing the car, there's an option for you: 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 shopper 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.
Are You Upside Down and Need to Keep the Car?
If selling your car isn't an option, and you can't refinance it or swap it (if you're leasing), it's time to have a talk with your bank.
"If a consumer isn't able to make their loan payment, they should call their lender right away," says Natalie M. Brown, 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."
Communication with your lender is vital and can be the difference between keeping your car and having it repossessed. The bank will want to know about the 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, or 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 it has exhausted other options.
But after three months of missed payments and no communication with the lender, chances are good that a repo truck will be out looking for your car.
Has the Bank Already Repossessed Your Car?
If you wake up and your car is gone from your driveway, all is not lost.
Once the car has been repossessed, the lender might allow you to get it back. This is called redeeming or reinstating your 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 at the auction, 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 costs.
So if you owed $15,000 on a car that is sold at auction for $11,000, not only would you have a repossession on your credit report, but you'd now owe $4,000 plus repossession fees for a vehicle you're no longer driving. And there is a good chance that debt will come back to haunt you.
"In the past, we'd see people with unpaid balances on their credit report from a previous repossession. Those balances would usually be charged off as a loss by the lender," says Paul Scott, a longtime finance manager for Southern California car dealerships. "Now we're seeing lenders garnish the wages of people who've lost their car to repossession. That's how some banks recoup their loss."
Repossession vs. Voluntary Surrender
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 considered 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.
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 shred your credit.
Can I Hide My Car From the Repo Man?
You can try, but don't count on being successful for long. I sold cars for more than a dozen years in Southern California and one of those was a used car to 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. According to Wells Fargo's Natalie M. Brown, 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 and avoid the situation entirely — if they can. 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."
We agree. The best ways to avoid a repossession involve decisions made well before the purchase. Buying the right car for your needs, factoring in the extra costs of car ownership ahead of time, and staying well within your budget instead of pushing it to the max — these are suggestions we'd give to all buyers before they leap into car ownership.
But if you find yourself in a sticky financial situation with your car and you have no safety net, we hope these tips — along with a little luck — will save the day.
To find a dealership that knows how to treat shoppers right, please visit Edmunds.com's Dealer Ratings and Reviews.