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The average car loan amount is high
In May 2020, the average loan amount for a new vehicle reached an all-time high of nearly $33,000, according to Federal Reserve data. If you financed that amount for 60 months at 5.14% (the average rate, per the Federal Reserve) your monthly payment could be north of $620.
You might be fine with that amount when you drive the car off the lot. But financial hardships like fluctuating income, a job loss, unexpected medical bills or emergency expenses at some point could make it difficult to manage a car payment.
When that happens, you may look for auto loan debt relief. Here are some options to consider.Have questions about coronavirus and auto loan relief? Learn more.
- Talk to your lender and ask for help
- Refinancing an auto loan: Things to know
- Selling or trading when you still owe
- The impact of car loan default
- What to know about repossession
Talk to your lender and ask for help
Auto loan lenders really don’t want you to default, which is why they consider your credit history (how well you repaid credit in the past) when deciding whether to lend you money to buy a car. If financial difficulties have you struggling to make your car payments, it’s a good idea to contact the lender to see if you can negotiate an affordable payment plan.
What’s more, during economic downturns, some auto lenders offer hardship programs, like auto loan deferment, to help borrowers stay afloat until circumstances improve. Just keep in mind that interest charges will continue to accrue on your loan during the deferral period, and you may end up paying more in interest on your loan.
Can I get auto debt relief from my lender?
- How to get out of a car loan when you’re upside down
- Learn about coronavirus auto loan payment and debt relief
Refinancing an auto loan: Things to know
Refinancing a car loan — paying off your current loan with a new one — can be a good way to lower your monthly payment. Refinancing may help you get a lower interest rate. Or you might be able to get a longer repayment period, which could help lower your monthly payment. Just be aware that stretching out your loan term could mean you end up paying more in interest over the length of the loan.
If possible, try shopping for a refinance deal before financial hardship affects your credit. Generally, good credit scores and good credit history can make it easier to secure a loan with a lower interest rate and better terms.
Should I refinance my car loan?
- When should I refinance my auto loan?
- Can I refinance my car loan?
- When refinancing a car loan may make sense
- How to refinance a car loan in five steps
- How to refinance a car loan when you have bad credit
Selling or trading when you still owe
Another option for reducing or even eliminating a car payment could be to sell or trade in your car. If you sell it yourself rather than trade it in at a car dealership, you may be able to get more money for your vehicle.
Trading in your current vehicle to get out of a big car payment probably only makes sense if your credit is good and you don’t owe more on your loan than the value of the car (known as being upside down). If you’re upside down, you may be able to trade your current car for a less expensive car or for one with lower financing costs — but it’s also likely the balance of your old loan will get rolled into your new car loan. That can increase the risk of your new auto loan also becoming upside down.
Should I trade or sell my car to get out of the loan?
- How to sell your car
- How to trade in a car
- How to trade in a car when you’re still paying off the loan
- What to know about negative equity on a car trade in
The impact of car loan default
When you stop making car loan payments, your auto loan can go into default. Defaulting on a loan can harm your credit.
Rules for when an auto loan is considered in default can vary by state and by lender. But the outcome could be the same — the lender takes back the vehicle, your credit takes a hit and you may still owe your lender money.
It’s probably a good idea to do everything you can to avoid defaulting on an auto loan.
What can I do about a loan that’s in default?
What to know about repossession
If you fall behind in making car payments, your lender likely has the right to take the vehicle from you. How soon a financial institution can repossess your vehicle after you miss a payment, and whether it must notify you first, varies by state.
You may think that letting the lender repossess the car or giving your car back voluntarily before it’s repossessed will solve your payment problems. But there could be significant financial repercussions down the road.
Late payments, missed payments and repossessions can appear on credit reports. And if your lender decides to sell your repossessed car to get back some of the money you owe, it could still take you to court to force you to pay any deficiency balance — the difference between the remaining balance on your car loan plus repossession costs, and what your lender earned from the sale of your repossessed car.
Is repossession the best option for me?
If your monthly car payment has turned into a financial hardship, it may be possible to find some auto loan debt relief. Contacting the loan company and asking for help should probably be your first step — and repossession likely should be your last resort. But no one solution is right for every financial situation, so be sure to explore all your options.