How to Manage a Car Payment You Can’t Make

If you find yourself among the growing number of car owners unable to make a car payment on time, there are steps you can take to help get back on track and minimize any financial damage.

Last year, after many pandemic-related aid programs ended, the number of consumers with late car payments began to steadily rise. According to credit reporting agency Experian, 1.89% of auto loans were 30 days delinquent in the first quarter of 2023. That’s compared with 1.56% during the same period in 2021. Auto loans with payments 60 days late — what most lenders consider severely delinquent — were at 0.76% in the first quarter of 2023 and surpassed pre-COVID levels late last year.

Opinions of auto and finance industry experts are mixed. Some view the increase in late car payments as a return to normal after the percentage of delinquent auto loans dropped during the COVID-19 pandemic. They also point out that the number of delinquent loans, as a percentage of all auto loans, is still relatively low. But some experts fear economic conditions will continue to push delinquencies higher.

Chris Kleczynski, PenFed Credit Union assistant vice president and head of product for automotive lending, says, “We could see a continued escalation in delinquencies. We could see things level off. A lot of it’s going to depend on macroeconomic factors and inventory supply stabilization of vehicles.”

Why are more consumers struggling to make car payments?

During the pandemic, many people spent less, received government stimulus checks, took advantage of the student loan payment pause and built a financial cushion that helped pay bills, including car payments. Financial situations improved, so more car buyers were able to finance cars that reached record-high prices due to vehicle shortages.

High car prices and rising interest rates have resulted in more people committing to higher monthly car payments. Automotive research firm Edmunds reported the average monthly payment for new vehicles hit a record high of $730 in the first quarter of 2023, with used vehicles at $551. And 16.8% of consumers who financed new vehicles during that time committed to monthly payments of $1,000 or more.

Many consumers have returned to normal spending habits and depleted their pandemic nest egg. Inflation is squeezing budgets, and more car owners are having trouble making car payments. In particular, younger borrowers are falling behind. New York Fed data shows that 4.55% of borrowers ages 18-29 transitioned to 90 days late on an auto loan payment in the first quarter of this year. That’s the highest percentage since 2009.

What to do when you can’t make your car payment

For car owners having trouble making a car payment, here are some possible solutions.

Are you experiencing financial hardship?

Chris Kukla, auto finance senior program manager with the Consumer Financial Protection Bureau, says contacting your lender to ask about hardship programs should be your first step. “There may be different ways that the lender can change the terms of the loan to try to make it more affordable,” Kukla says.

Some lenders offer an auto loan deferment, meaning a certain number of payments are moved to the end of your loan, so you can skip those payments now. This can give you time to catch up and get payments under control.

It’s important to realize that deferred payments will become monthly payments at the end of your loan, which is why your lender may also call it a loan extension. You aren’t permanently skipping the payment, and extending the loan means you will be paying interest for a longer period of time.

While it can be uncomfortable to contact a lender to explain the loss of a job or mounting medical bills, it’s still the best course of action. Lenders know that people face unexpected circumstances, and they don’t want to repossess, which is time-consuming and leaves them with unwanted vehicles. You won’t know if a lender is willing to help unless you ask.

Does your budget need some attention?

It may be that taking time to build or refresh a budget can help you come up with the money to make your car payment. You might try the 50/30/20 budgeting plan, which is spending roughly 50% of your after-tax dollars on necessities, no more than 30% on wants, and at least 20% on savings and debt repayment.

If you’re spending most of your money on wants versus necessities, lenders won’t be as accommodating if you contact them to say you can’t make a car payment.

Should you replace your car or maybe your loan?

Downsizing to a less expensive car and lower car payment, or selling your car and using other transportation — while inconvenient — are still options.

If you plan to sell your car or trade it in for a less expensive one, take time to look up your car’s value using online guides like Kelley Blue Book and Edmunds. You’ll want to get the most out of your car that you can. Also, if you find that you’re upside down on your car loan, or owe more than it’s worth, selling or trading the car might not be the best financial decision. You will likely receive less for the car than the amount still owed on the loan, and you would have to pay the difference.

You could also consider replacing your current car loan through refinancing, especially if you think you could qualify for a lower interest rate. In the current rising-rate environment, it might not be as easy to find a loan with a lower rate, but it’s worth looking into.

If you apply to prequalify with refinancing lenders that use a soft credit check, it won’t impact your credit score. It also won’t mean you’re approved for a loan, but it can give you an idea of whether you might qualify for a lower rate.