Are you struggling to make your auto loan repayments? If you fall behind on your auto loan payments, there can be serious consequences: Your lender can repossess your vehicle, and your credit history may get damaged in the process.
Life circumstances often cause people to fall behind on their auto loans, says Carroll Lachnit, a consumer advice editor at Edmunds.com, an online resource for automotive information.
"People lose their jobs," she says. "People get divorced. People buy cars that are more than they can afford. Maybe you bought a car with your spouse, and your spouse has passed away."
Loans can go into default whenever a borrower fails to make a payment on time. The exact timeline depends on your loan terms. However, your lender may offer you a grace period for you to bring your payments current. Be sure to consult your loan agreement's terms of repayment.
3 Tips if You're on the Road to Default
There may be some things you can do to help prevent your loan from going into default if you've missed a payment or are about to do so.
1. Seek professional financial help.
Gerri Detweiler, credit expert and author of "Debt Collection Answers," says you may need professional advice to get back on track if you're about to miss a car loan payment.
"If you are at risk of falling behind on your auto loan, you may want to reach out to a reputable credit counseling agency that can help you go over your budget and try to find a way to free up money to pay off the loan," she says.
According to the Federal Trade Commission (FTC), universities, credit unions, housing authorities and military bases often offer reputable credit counseling programs.
Make sure the counselors are certified and trained in consumer credit and money management. A reputable agency will send you free information about itself without requiring you to reveal the details of your debt situation. And be sure to ask about fees. If there will be a charge for credit counseling, the FTC advises that you get a specific quote in writing and don't sign anything until you read it.
If one organization won't help you because you can't afford to pay, the FTC suggests that you find another one to work with.
Loan counselors at nonprofit agencies often work with creditors, such as credit card companies, to reduce debts or lower interest rates so people can get caught up on their bills more easily. Look for a free or fee-only agency or adviser.
2. Negotiate with your lender.
Most lenders would rather help you with your payments than go through the hassle of repossessing your car and selling it to recover the debt. Detweiler suggests contacting them before your loan goes into default. If you can give them a good reason for your financial problems, they may be more inclined to help.
According to Lachnit, your lender may help you in the following ways, including:
- Working with you to renegotiate the loan terms.
- Deferring your payments for 30 days.
- Reducing your monthly bill by stretching out the loan repayment period.
3. Sell your car.
Detweiler says one way to avoid default is to sell the car and pay off the loan. This isn't always an option, however. Cars depreciate in value over time, so you may not be able to sell your car for enough money to cover your entire debt.
If you can't get enough money to pay off the loan, it may make sense to sell the car for the best price you can get and, if possible, borrow money from friends or family to pay off the rest of the auto loan. This can help you avoid default and protect your credit history.
The Consequences of Defaulting on an Auto Loan
Unlike unsecured loans, which are generally supported by your personal creditworthiness, auto loans are typically secured loans that are backed up by collateral. In other words, if you fail to make your payments on time, your lender could eventually take your vehicle.
Typically, your lender will spell out the terms for repossession in your loan agreement. According to the FTC, once a car loan is in default, the laws of most states allow lenders to repossess the car at any time without notice. They may keep the car as compensation for the debt or resell it.
If a lender sells your car but doesn't get enough money to cover what you borrowed, "you're on the hook for that (amount), too," Lachnit says. If you fail to pay the difference between what you owed and what the lender recovered by selling the repossessed vehicle, that information may go onto your credit report and likely will make it more difficult for you to successfully apply for future loans.
The FTC says that some states may allow you to "reinstate" a loan after your car has been taken back by the lender. You can reclaim the vehicle by paying the amount you failed to pay on time, along with your creditor's repossession expenses.
Defaulting on an auto loan may damage your ability to secure future credit - so if you find yourself behind on payments, it's in your best interest to work with your lender on a plan to make your loan current.
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