What Happens if I Can’t Make the Payments on a Car Loan?

Options

You can call try to sell your car if it has equity in comparison with its payoff amount. If you can sell your car for more than you owe, you can keep any profit you make. You can also purchase another car and trade your current car in, possibly lowering your car payment. Refinance your vehicle through another lender if your payment is too high because of interest rate or to extend your loan. This will also allow you up to 45 days until your next payment is due and also lower your payment. Repossession, or returning your car to the lender and defaulting on your loan, should be a last option only. If you have a good payment history with your lender, you can cask to defer your car payment or extend your loan term to lower payments.

Considerations

If deferring your car payment is not an option, your car must have established some equity in order to sell, trade or refinance. Vehicle equity depends on the term of your loan, payments you’ve already made, your interest rate and the price you bought your car for. Once you have your vehicle’s payoff amount, you can check popular Internet appraisal guides for values, such as those at Edmunds, MSN Autos or National Automobile Dealers Association Guides to judge. Refinancing may prove impossible if you owe more than your car is worth, as banks lend based on vehicle value.

Repossession

Repossession should remain your last option. When you return your vehicle to the bank, it will be sold at auction for wholesale value, also known as trade-in value. You must pay for any loss to the bank once it is sold. While the bank will give you some time to work out payment arrangements, the debt must be paid or settled. If you settle your debt instead of paying the total amount, you are responsible for paying taxes to the Internal Revenue Service on the amount left out of your settlement, as the IRS considers the amount profit. Or the bank may pursue a judgment and garnish your wages for nonpayment.

Credit Damage

Repossession and bankruptcy have long term affects on your credit rating. It becomes extremely difficult to obtain another line of credit for years to come. Even if you voluntarily repossess your car, meaning you call bank to arrange return instead of the bank having to send out a tow company to get the car back, the affect on your credit is the same. If you plan to pay off the debt afterwards, the repossession will show as “settled” or “paid” on your credit, but does not remove the mark from your report. If you are late on your payments and want to trade your car in and obtain another loan or refinance, approval is unlikely because your credit report will state the amount of days you are past due on your account.

Prevention

Call your bank as soon as you realize you cannot make your car payment. Many banks would rather work with you to make payment arrangements than repossess your car. Some banks will allow you to adjust your contract for a longer term, which can lower your payment for the time being. In addition, your lender may defer one to several car payments, allowing you time to find a job, catch up with bills or even sell your car. Don’t wait until you are past due; call when you realize you cannot pay to find out your options.

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