What Happens If I Can’t Make My Car Payments?

Nobody expects to fall behind on their auto loan payments. Yet unexpected life changes, such as losing your job or a reduction in income, might make it more difficult for you to make your car payment. Moreover, paying for a car loan in 2024 is getting harder as interest rates and auto payments keep going up.

Defaulting on a vehicle loan payment can have far-reaching consequences. Your automobile might be repossessed, possibly without prior notice. Additionally, missing auto loan payments can damage your credit score even if you avoid repossession.

Fortunately, you have options if you’re having trouble paying off a car loan or lease.

What to Expect if You Fall Behind on Car Payments

Defaulting on your car loan has short and long-term consequences. First, your credit score drops each month that a payment is late. Also, your vehicle may be repossessed if you cannot catch up. Even if you sell your car, you can still owe money on it.

The long-term effects of defaulting on an auto loan include low credit scores, difficulty obtaining new loans, and higher interest rates on existing loans.

So, it’s best to act fast if you are concerned that you may be unable to pay for your next auto payment. When you identify your vehicle loan problems early and take appropriate actions, you increase the chances of resolving the issue and avoiding unfavorable outcomes.

What To Do If You Can’t Make Your Car Payments

The following are things you can do to help you catch up on auto payments and possibly prevent some of the unpleasant effects of being behind.

Negotiate with Your Auto Lender

Informing your lender about your financial status may not seem like the wisest action. However, your lender doesn’t want the situation to get worse. Before you fall behind on your auto payment, inform your lender about your circumstances. Many lenders are open to working with borrowers to manage their payments. If you’re working on your finances, they might be able to adjust your loan temporarily.

Moreover, you may work out a loan deferment plan if the circumstance is temporary, such as if your payday has shifted or you only need an extra week or two each month to have the money on hand. Certain financial institutions may allow you to suspend payments for up to one month without incurring penalties if you have a history of on-time payments.

Alternatively, you may also bargain with your lender to modify your payment schedule. Your lender could be open to working with you to arrange a payment plan that works for you and prevents you from going into default. For example, your lender might allow you to pay off past-due payments gradually, extend your loan period to reduce your monthly payments or split your payments into smaller biweekly installments.

Note that these solutions may incur costs, resulting in more interest than you would have otherwise. Also, your lender can offer these alternatives only if you contact them promptly.

Consider an Auto Loan Refinance

When you refinance, you get a new loan—often from a different lender—to replace your existing one. You might be able to lower your monthly payments by obtaining a loan with a longer payback period than what is left on your existing term. For instance, you may refinance with a 24-month loan if your vehicle loan has 12 months left.

However, there are conditions you must meet. You can refinance your auto loan only if you have been making on-time payments and still have a decent credit score. Also, note that this is only a practical option when financial difficulties are temporary.

While refinancing can extend the loan’s terms and help with your cash flow, costs are attached. Certain lenders could also charge you a penalty if you pay off your loan early. Still, all these costs are worthwhile since they prevent losing your car to repossession or harming your credit score.

  Debt Consolidation Can Help with Auto Loans

Debt consolidation refers to merging many loans into one with a lower monthly payment and a better interest rate. Some people may benefit from debt consolidation, but weighing the risks and benefits is crucial.

It’s easier to manage your debt when you consolidate all your loans under one. Instead of worrying about several bills, you simply need to worry about paying one. Extending the duration of your payments may result in a lower monthly payment, providing additional financial flexibility.

However, as you spread out your payments, you may pay more interest overall even though you pay less each month. Also, some costs associated with certain consolidation options might reduce your savings.

Examine your alternatives, carefully balance the benefits and drawbacks, and consider your financial condition before consolidating your debt. It’s also helpful to speak with a financial expert who can provide guidance specific to your circumstance.

Bankruptcy Is Another Option

If your unpaid auto loan is due to a trend of excessive debt, you might consider filing for bankruptcy. Doing so could significantly lessen your debt-related stress. But bankruptcy has severe financial repercussions, so think of it as a last resort.

Bankruptcy affects car loans differently, depending on the chapter you filed. In Chapter 7, your unsecured assets might be sold to pay back what you owe, which could mean giving up your car unless you can still pay for it. However, filing under this chapter is like getting a clean slate to start over.

Chapter 13, on the other hand, helps people make a schedule to repay debts while keeping their stuff, like your car. However, it only works if you have a steady income to follow the plan.

If you decide to file for bankruptcy, it’s best to consult with an experienced attorney who can help you understand the potential long-term effects. Additionally, only consider filing for bankruptcy if all other options have been exhausted and your financial difficulties persist.

How to Prevent Auto Repossession

While the actions mentioned above can protect you from losing your car, there are still more options available that can prevent your lender from repossessing your vehicle.

Talk to Your Lender Before Repossession

Talking to your lender about missing your car payments cannot be overemphasized. From having to charge off your loan, engage a repossession agent, store your vehicle, and sell it at auction, this is a major nuisance for most banks. As a result, informing your lender about your financial situation and negotiating when and how you will be able to repay could work in your favor.

Sell the Car First

Sometimes, selling your car and paying off the loan is preferable if you cannot make the payments any longer. But keep in mind that you will still be responsible for the difference if the value of your vehicle is less than the loan sum. Selling your car preserves your credit, so it’s still a wise decision, even if you don’t have enough cash for a down payment on a new vehicle.

Trade in Your Car

You might avoid repossession by exchanging your vehicle for a cheaper model at a dealership. Try to find out the value of your car so that you can bargain for a reasonable price. However, this strategy might be less effective if you owe more money than the vehicle is worth. You might switch from one unaffordable loan to another due to the remaining debt not being covered by the trade-in.

Voluntarily Surrender your Car

If you can’t afford the payments any longer, you might voluntarily turn in your car to your lender. Though you are taking charge of your debt and accepting responsibility for it, a voluntary surrender will still significantly affect your credit scores—just not as much as an involuntary repossession.

Protect Your Credit Score from Auto Loan Default

Though credit reporting agencies are usually not notified until two or more payments are overdue, missing your car payments by more than a month is considered a delinquency. Delinquency on a credit report can diminish credit ratings and limit a person’s future borrowing capacity. A delinquent record stays on the credit report for seven years.

Here are some ways to minimize the damage of auto loan delinquencies on your credit score

• Prioritize paying at least the minimum amount due on time each month to avoid delinquencies
• Set up automatic payments to avoid missing deadlines.
• Talk to your lender if you’re facing financial challenges. They may have options like deferment or modifying your loan that could help ease the burden.
• Communicate with your lender about financial difficulties and explore deferment or loan modification options.
• Set up automatic payments to avoid missing deadlines.
• Monitor your credit report regularly for accuracy and dispute any errors.
• Avoid applying for new credit if you’re already struggling with delinquencies.
• Develop positive credit habits such as making timely payments, keeping credit card balances low, and applying for new credit only when necessary. Over time, they can help offset the impact of delinquencies.

How to Move on After Auto Loan Delinquency

Moving forward after defaulting on your auto loan requires proactive steps to regain financial stability. You can overcome auto loan delinquency and work toward a brighter financial future by managing your finances responsibly and seeking necessary support. Take advantage of the following resources :

Create a Budget

Creating a budget is key to managing your money wisely. It helps prioritize important expenses and sets aside money to pay off debt. You can use budgeting apps to track spending, set savings targets, and handle debt more efficiently.

Focus on Financial Literacy

Financial literacy gives you the know-how to rebuild your credit, steer clear of future money troubles, and secure your financial future. Make the most of websites that provide helpful articles, tools, and resources on budgeting, managing credit, and tackling debt. They’re packed with valuable information to help you make smarter financial decisions.

Seek Credit Counseling

Credit counselors are there to support you in managing your finances better. They can assist you in creating a budget, handling debt, and enhancing your credit habits. Plus, they offer advice on negotiating with creditors and setting achievable financial goals. By seeking credit counseling, you can regain financial stability and prevent future financial difficulties.

Speak to an Ohio Debt Lawyer

Dealing with car loan payments can feel like a lot to handle, but tackling the issue head-on is crucial. Remember to focus on what matters, keep the lines of communication open with your lenders, and don’t hesitate to explore debt assistance options. With careful planning and professional legal help, you can work through these challenges and get back on track to financial well-being.

Jeremiah E. Heck is a leading consumer attorney and founding partner of Luftman, Heck & Associates, committed to helping individuals navigate the complexities of challenging debt like an untenable auto loan.

Contact LHA for a free, no-obligation consultation. We’ll carefully examine your debt issues and chart the most effective action that lets you keep your car and preserve your credit.