Auto Loan Debt Relief: Know Your Options

Auto loan debt relief refers to different strategies that can help a person who is struggling to repay a car loan.

Options can range from keeping the car and working with a lender to lower the payment to giving up the car. The best approach depends on your personal situation, how far behind you are on car payments and the amount you still owe.

Here are some auto loan debt relief strategies to consider.

Ask about auto loan modification

As soon as you realize an auto loan payment is going to be out of reach, talk to your lender about possibly modifying the loan to make it easier for you to pay. Lenders don’t want borrowers to reach the point of defaulting on an auto loan or having a car repossessed — since repossession is a major cost to the lender — so they may offer some of the following options:

• Defer auto loan payments. A lender may agree to move a certain number of payments to the end of your loan, so you can skip those payments or make interest-only payments. If your financial difficulties will be short-term, a deferment can give you some breathing room to catch up. Just realize that you would not be permanently skipping payments. Your loan repayment period would be extended to include the payments at the end, so you will pay more in total interest. You may also be charged a fee to defer payments.

• Change your loan term or interest rate. Your lender might offer to reduce your interest rate or extend the loan repayment term in order to lower your monthly payment. Not all lenders will offer such modifications, but some will since a reduced payment is viewed as better than no payment. Although a longer loan term can help make payments more manageable, it will also cost you more interest over the life of the loan.

• Make special payment arrangements. A lender may suggest solutions specific to your situation based on your conversation with them. For example, if you change jobs and won’t receive a paycheck for two weeks, your lender might adjust your payment due date and agree to a partial payment during that time. 

The best time to inquire about loan modification is before you miss a payment, if possible. Once a payment is 30 days past due, or soon after, your loan is considered delinquent by most lenders that then report it to the credit bureaus.

Many lenders offer hardship programs specifically for borrowers who encounter financial difficulties — such as job loss or unexpected medical bills — to help them stay afloat until the situation improves. Often information about the availability of hardship or relief programs can be found on a lender’s website.

Refinance your car loan

Unlike loan modification, which makes changes to your current loan, refinancing involves getting a new loan through a different lender or, in some cases, your existing lender. The goal is to replace your current loan with one that has a lower interest rate or longer repayment term, resulting in a lower, more manageable car payment.

Refinancing to a lower monthly payment can give you some breathing room, but it also means you’ll pay more in interest overall. That may still be a better option than getting behind on car payments and damaging your credit.

Also, getting approved for an auto refinance loan, especially at a lower rate, will be a challenge if you’re already past due on payments for your current loan. But, if you haven’t yet missed a payment and think you could qualify for a lower rate (for example if you received a very high rate at a dealership), refinancing could be an option. Many lenders offer pre-qualification with a soft credit check, so you can get an idea of whether you might qualify for a lower rate without impacting your credit score.

Trade or sell your car

If you financed more car than you can afford, replacing it with a less expensive model and lower payment could be a solution. When trading or selling a car you still have a loan on, take extra steps to get the most possible out of it. You want to be able to pay off your current loan and put money toward your replacement vehicle if possible.

If you find you owe more than the car is worth, called being upside down on your car loan, selling or trading it may not be the best option. You will likely receive less for the car than the amount still owed, and you would have to pay the difference or roll the negative equity into a new loan.

Voluntarily surrender your car

You can talk to your lender about voluntarily giving them your car, also called voluntary repossession. The lender will then resell the vehicle, and you would have to pay the difference between what the car sold for and the amount you still owe on your loan. You might also have other fees. Voluntary surrender is still considered defaulting on the loan and will show on your credit report, but it may be less damaging since lenders can see you were proactive in trying to resolve the situation.

Settle your car loan

Through auto loan settlement, a lender agrees to accept less than the remaining amount you owe on a loan. Usually this is paid in a lump sum, and you no longer owe money on the loan. The lender or a collection agency may offer an auto loan settlement, and depending on how much you owe, it may be a better option for the lender than a time-consuming repossession.

There are also companies offering debt settlement services that borrowers can pay to help settle a debt with a creditor. These companies advise a person to stop making loan payments and direct that money into a special account. Once the account reaches a certain balance, the debt settlement company attempts to negotiate with a lender to accept the balance amount to pay off the loan. Debt settlement services can be costly, can damage your credit and offer no guarantee of being able to settle. There are better options for auto loan debt relief.

Auto loan debt relief: the bigger picture

Often, the need for debt relief extends beyond a borrower’s auto loan. If your car payment is contributing to a larger financial struggle, you may want to consider credit counseling or debt management. You can consult the Financial Counseling Association of America, National Foundation for Credit Counseling or the American Association for Debt Resolution where reputable companies are likely to be registered.