What To Do When You Can't Afford Your Car Payment
You've come to the realization that you can’t afford your car payment. It may be the result of a job loss or that you want to buy a home. Or perhaps you’ve written out your budget for the first time, and realized that you are spending too much on your car every month. Or you may have rolled your old car loan into a new one and driven up the cost of your car payment. Don't worry, you have options.
However, be careful to select the right course of action so you don’t hurt your credit, which could cost you more in the long run. Read on for our tips on what to do if you can no longer afford your car payment.
Don't Turn the Car Over to the Bank
Once you have determined that you cannot afford your car you may be tempted to stop paying on it, and simply turn it back over to the bank, or allow them to repossess it. While this is an option, it is not a wise one.
For one, this will negatively affect your credit score. Additionally, this doesn’t release you from the financial obligation you already have on the loan. Once the bank sells the car, you will still owe the difference between what the car sold for and what you owed on the loan, also called the deficiency. You will also owe any repossession costs.
Don't Trade the Car Into the Dealer
You may decide to trade the car in for a less expensive one at the dealer. While this may substantially lower your monthly payment, you will still have to pay back what you owed on your old car. Often, the dealer will roll any excess that you owe on the loan into your next car loan. This means that you will be upside down on your loan (meaning you will owe more than the car is worth), on your new car. However, this may lower your monthly payment and may be worth it for you in the long run, depending on your circumstances.
Sell the Car Yourself
Your best option is to try to sell the car yourself, then take out a personal loan to cover the difference in the amount you owe. When you complete a private sale, you are able to get more for the car than you would if you were going to sell it to a dealer, since you are cutting out the middleman.
You may be wondering if taking out a loan to pay off the remaining balance of your car is financially wise, but it will help you reduce your overall debt. It also depends on the amount you still owe on your car, the monthly payments this loan would have, and the interest rate you would be able to get. Be sure that this isn’t more than what you were paying for the car payments in the first place.
Buy a Cheap Car with Cash
Once you sell your current car, you may want to consider buying a less expensive car, especially if you need a car for your everyday life, like getting to work, getting groceries, going to the gym, and the like. (Before you purchase another car, however, check out the public transportation system in your city to see if its a viable option and if you really need a car.)
If you do decide you need a car, try to stay at a realistic budget, like $1,000. That way, you can pay cash and avoid having car payments, which will then free up extra money to pay off the remaining balance of your car loan.
However, keep in mind that when you buy an older car, you need to plan for extra car repairs with your emergency fund. Keeping this in mind will help you keep a realistic budget and avoid going into debt by paying for pricey and unexpected car repairs.
Start by researching the most reliable cars, and have a mechanic look over the car for you before you purchase it. Be sure to do your research, so you find a car that will fit your needs that you can also afford. You are looking more at the engine rather than the cosmetic appearance of the car.
It is possible to find a reliable car that costs very little. And keep in mind that most car repairs would be less a pricey car payment. Also, if you are going to be commuting look for a smaller car versus a larger SUV, which will allow you to save on fuel costs. This will free up more money that you can then put toward getting out of debt.
Updated by Rachel Morgan Cautero.