If you are falling behind on your car note, you are not alone. Borrowers are missing car payments now more than ever. Before you miss a car note, make sure you have tried these options.
Borrowers with low credit scores are falling behind on payments at a faster rate than other borrowers. And, if you miss a car payment, your credit score will drop immediately. In fact, missing a car payment is one of the worst types of debt to default on because of the impact it has on your credit score. The good news is that a defaulted car loan is easier to recover from than, say, a missed mortgage payment. But, if you miss too many payments, you will ultimately be facing repossession of your vehicle.
Before you default on your car loan, explore these options.
Talk to Your Lender: The reality is that your lender would rather have cash from you than to take your vehicle. Ask if you can extend the length of your loan for a smaller monthly payment, negotiate your interest rate, or ask for a 30-day deferral (sometimes lenders will allow you to move a monthly payment to the end of your loan term). Lenders are under no legal obligation to help you, but they may surprise you – it doesn’t hurt to ask.
See if you can sell it or trade it in: Do you have equity in your car? (Is your car worth more than the balance you owe on it?). If so, you may be able to sell it and pay off the loan. If your balance is more than your car is worth, be careful. Some lenders will still let you trade-in your car, then they will finance the remaining balance into your new car loan. This may lead to an even higher car note. Do the math first.
Refinance your car loan: You might be able to get a new loan to pay off the old loan with a lower interest rate, or at least a lower payment. You may end up paying longer, but a lower payment might relieve some immediate financial stress. You can also explore peer-to-peer lending sites like LendingClub and Prosper where you might get a better rate than conventional lenders. There are also peer-to-peer lease exchange sites like Swapalease and LeaseTrader if you have a vehicle lease you want to get out of.
Consider Chapter 13: For many people, Chapter 13 is a viable option. Chapter 13 protects your car from repossession while you pay it off through a personal reorganization plan. Even if you are behind on payments, you can keep your car without having to pay large amounts of money to your lender to bring your car note current. Chapter 13 stops repossession attempts by your lender and even lowers your interest rate and monthly payment. If your credit score is already suffering, Chapter 13 will get it quickly moving in a positive direction. Talk with an experienced bankruptcy lawyer for advice in your situation.
Remember, the impact of a car loan default will impact your credit. According to Autos.com, a default can drop your credit score up to 100 points and will stay on your credit report for seven years. Bad credit, of course, makes it harder to get a loan in the future. Make every attempt to avoid missing a car note before it happens. But if it does, you do have options.