You don’t drive a new car out of the showroom thinking that you’ll ever become delinquent on your payments. Unfortunately, life sometimes has different plans for you. Whether it’s due to a change in career trajectory, health issues or some other unforeseen obstacle, you can find yourself unable to make your monthly car payments suddenly and without notice. Before you panic and do something drastic, consider all your available options; you might just find a solution that helps you keep your car without wrecking your finances.
Reset your budget
One of the first steps that you should take when shopping for a new vehicle is figuring out what your budget looks like. By crunching all your monthly numbers, you’re able to get a sense for what you can afford in terms of a monthly car payment. Not being able to make your monthly payments anymore is a strong indication that your budget has changed and needs to be reevaluated from top to bottom.
Because you are contractually on the hook for a monthly car payment, you need to prioritize making that payment over other expenses that will not negatively affect your credit score, never mind compromise your source of reliable transportation. If possible, try to cut back on entertainment like movies and meals out and eliminate or minimize unnecessary expenses in your budget. You may be surprised to find that crafting a shoestring budget and sticking to it can keep you flush with your payments until your situation improves.
Figure out what you’re working with
Your circumstances will vary depending on several factors related to your vehicle and the financial agreement you signed. Sean Pyles, who covers debt and personal finance for Nerd Wallet, suggests that you figure out three key factors prior to making a big decision: how much your vehicle is currently worth, how much you still owe on it and what the interest rate and remaining life on the loan are.
If you owe less on the vehicle than its value, you’ve got positive equity, which makes it easier to work your way out of a tough situation. Your options here would include refinancing with a lower interest rate and a longer term or trading in or selling the vehicle directly to the dealership. Miriam Caldwell of The Balance also suggests selling to a third party as you will get closer to the vehicle’s true value than you would at a dealership, but this could take more time to pull off and may not be feasible if you are feeling the pressure.
If you have negative equity, otherwise known as being upside down or underwater on your loan, you will still have options to work with. As suggested by Frank Witsil, a contributing writer at the Detroit Free Press, you can use emergency savings or a tax refund to catch up on the difference between the actual value of the vehicle and what you owe and then sell it or trade it in. You can still sell or trade in your vehicle, but if you are underwater, you’ll need to pay that difference back somehow.
Talk to your lender
Rather than playing from behind, you’ll want to make as much of an effort to get in front of financial issues as you possibly can. Jeff Huang, the sales supervisor of a Los Angeles-based auto financing company, tells Pyles that a conversation with your lender may go more smoothly if you have it before your first missed payment.
Huang says that your loyalty and history with a lender may earn you some leeway, giving you time to catch up without severe penalty. If you can explain why your situation merits missing a payment, you could be offered forbearance, a period in which you can skip payments or pay what you are able until you are financially sound again. You may also be offered the ability to extend the terms of your loan, which would result in higher interest paid back to the lender in the long run but would lower your monthly payment and prevent significant damage to your credit.
Falling behind on your car payments can be harrowing, but it doesn’t have to spell disaster for your credit and your ability to get around. Talk to your lender or a trusted financial advisor and figure out your options, then take the appropriate steps to pull yourself out of the whole and get back on even ground.