Can't Afford Car Loan or Lease? Behind on Payments?

Missed car payments or in danger of repossession? What you can do when you can no longer afford your car loan or lease?

In a tough economy when jobs are being lost and finances are tight, it is often a struggle to make car payments. Many people find themselves in a situation in which they are behind on car payments and can no longer afford their car — or can't afford payments to buy another car (see Cheap Cars - Options).

Cars are being repossessed and returned to banks and finance companies at an alarming rate. Even when people can no longer make payments and voluntarily return their cars, they find it doesn't solve their problems. In fact, it often makes the problem worse. Problems are especially acute for people with upside down loans – they owe more than their car is worth.

If you arrived at this page because you are looking for repossessed cars for sale or auction, see our article, Repo Car Sales and Auctions.

To stop making payments on a car loan, or having missed a series of payments, puts the car loan in "default." The definition of "default" can vary between lenders, but it is always defined in the loan contract. It defines the conditions under which a loan goes into default and what can happen as a result.

Let's take a look at the problem and examine some possible solutions.

Refinancing your car loan or lease
Many people feel that if they could just get a little lower monthly payment, they could keep their car and continue paying off their loan or lease. One way, they feel, is to refinance their loan or lease. It seems to work with home mortgages, so why not car loans?

It's important to understand that refinancing a car loan is not simply a matter of changing the interest rate or other factors. It means getting a new loan to pay off and end an old loan. Or a new lease to pay off and end an old lease.

Before we discuss loan refinancing, let's get it out of the way and just say that car leases are almost impossible to refinance. It simply costs too much to end a lease to make it worthwhile to end one lease and begin another. Furthermore, there are no longer lease finance sources, banks or finance companies who do used-car refinance leases.

Back to the topic of refinancing car loans. Unless loan interest rates have changed significantly since you bought your car (rates have changed very little in the last few years), or your credit score has improved significantly (which would get you a better interest rate), or you extend the length (term) of your loan by another few years (do you really want to be still paying on an old car years from now?), refinancing your car loan may not affect your monthly payment significantly enough to make it worthwhile. But you should investigate anyway because every situation is different.

Getting a used-car refinance loan is like getting any other used-car loan. Banks, credit unions, and online car loan companies such as up2drive.com offer them. Applying and getting a quote are free and gives you a chance to determine if you'll benefit from refinancing.

Also consider credit unions for your refinance loan. They tend to look less at credit scores and more to personal relationships.

Trading for a cheaper car
If you can't afford your current car payments, you could consider trading for a cheaper car. This might work if your current loan payments are too high and you would like to trade down to a less expensive car to lower those payments. It works best if you are not "upside down" — if you don't owe more on your loan than your car is worth as a trade vehicle. Your dealer takes your old car, pays off your loan, and applies the remaining "equity" as a down payment on your new car. If your new car is less expensive than your old car, then you have an excellent chance that your new payments will be lower than your old payments.

However, most people in this situation are upside down — they owe more on their loan than their car is worth. They have negative trade equity. Trading to buy a cheaper car may not, and probably will not, result in lower monthly payments. The negative equity from the old loan is added to the cost of the new car, which means the new car may not be cheaper any more, and monthly payments will likely be higher than before. Furthermore, a bank or loan company will not approve a loan amount greater than the value of the car, unless the dealer can somehow "hide" the negative equity from them.

However, this could work if the amount of negative equity is relatively small, the price of the new car is significantly less than the old car, and the new loan is longer than the remaining time on the old loan.

Again, this rarely works for leased cars. Although dealers might try to convince customers otherwise, trading a leased car is almost never a good idea and will not solve affordability problems.

Selling your car to buy a cheaper car
Although you get more money by selling than by trading, the same issues apply. If you are upside down on your car loan, the selling price won't cover your loan, and you would have to add cash to make up the difference to pay off the loan, to get the title to give to the buyer. Then, you must come up with more cash or a loan to buy another car. This is difficult to impossible for most people who are already in a tough financial situation.

If you are not upside down, sell your car, it is much easier. Sell your car, use part of the sale money to pay off your loan, and use the rest as a down payment on a cheaper car — and lower monthly payments.

Can I change my car loan to a lease to get lower payments?
Short answer: No. Long answer: Finance and loan companies can't simply change a loan to a lease. Theoretically, you could accomplish your objective by getting a new lease to pay off your old loan, and enjoy much lower payments. However, in the current economic situation, there are no finance companies now who will provide a lease on a used car. This wasn't true as recently as a few months ago, but it's true now. It might change in the future when the current credit crunch is over.

What if I just can't make my car payments?
If you can no longer make your car payments, or debts have closed in on you, and you have missed payments, your car is in danger of being repossessed. State laws partly define what is considered a "default" that allows a repossession, and it differs between states and finance companies. However, the definitions are spelled out in your loan or lease contract, in the fine print. If you have defaulted, your bank or finance company has the legal right to come take (repossess) your car. Laws also determine how, when, or if you are to be notified.

What happens if my car is repossessed?
If you have a series of missed car payments the bank or finance company hires a "repo" company to find and pick up your car. The car is soon sold at a wholesale car auction.

A judgment will be filed against you in court and you will be sued for your loan balance, minus the amount received from the car sale. You could owe thousands of dollars, plus repo fees, storage fees, and administration fees. But the worse part is that your credit record will now show the repo, and will damage your ability to get new loans or other credit for up to seven years. Furthermore, you have no car — and almost no chance of getting another loan for another car. Not good.

You could voluntarily turn in your car to your bank or finance company (not your dealer) but it is still considered a repossession. The only thing you avoid are the repo man's costs.

How to avoid a repossession
As soon as you know you are going to have problems making your car payments, contact your bank or finance company immediately. Don't procrastinate. Don't be embarrassed. Just do it. The bank or finance company does not want your car back. They will do everything within reason to help you keep your car.

If you are already late with payments or have missed payments, contact your lender immediately. Don't wait for the repo man. It will be too late. Once your car is repossessed, the only way to get your car back is usually to pay off the entire remaining loan or lease balance – in cash — no more monthly payments. Some lenders might be a little more lenient and allow you to catch up on payments.

We've heard some people say, "let them repo my car, my credit is terrible anyway." Or "I'll just turn in my car to the dealer and walk away." That's not very smart. First, you will still owe your loan balance, you'll have no car, and your credit will be damaged so badly that you won't be able to get another loan for seven years.

You should do anything and everything to avoid a repossession. Get a second job, borrow money from family, work with your bank or finance company, sell your car, but try every possible solution before allowing a repo.

An idea that might work - short sell
It's done with homes that are in danger of being foreclosed on and, to a lesser degree, done with car loans in danger of repossession. It applies to loans that are upside down — you owe more than the car is worth. It's call a short sell. It works best if your car loan is with a local bank or credit union, not so well with a carmaker's finance company such as GMAC or Ford Motor Credit. Here's how it works.

Explain to your bank why you will no longer be able to afford your car and that a repossession is unavoidable. Ask them to allow you to sell the car for a fair market price (check with www.kbb.com and www.nadaguides.com) and agree on a price. Even though the money doesn't fully cover your outstanding loan, the bank agrees to write off the balance and close the loan. In most cases, your credit is not affected. However, you may have to pay income tax on the write off amount since it is kind of gift from the bank. You would pay at the time you normally file your tax return.

Don't expect this tactic to work in all cases. The reason it can work is that, if you sell the car yourself instead of turning it in to the bank, the bank gets more money than if the car is repossessed and sold at a wholesale dealer auction.

With a lease, try a lease transfer
If you can no longer afford your lease and need to get out of your car, consider a lease transfer, usually called a lease assumption. With the lease company's permission and assistance, you transfer your lease to someone else who will take your car and complete your lease. It is a relatively easy process and is not nearly as expensive as an early lease termination. Here is an article that provides more details: Transfer a Car Lease.

Summary
If you are having problems making your car payments, try to avoid a repossession in every possible way. There are solutions that might work for you and allow you to sidestep the awful and long-lasting problems of a repo.

For more, see our related article, Bad Credit Car Loans and Leases.

For more, see LeaseGuide.com