What to Do When You Can't Afford Your Car Payment

Car windshield with for sale by owner sign
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Failing to make car payments should never be an option, no matter your financial circumstances. If your situation is dire and you can't afford to make a payment, first and foremost call your lender. Explain the situation and, if possible, have a budget prepared that includes a dollar figure you can afford for a monthly payment. Lenders would rather work with you to negotiate a payment plan than repossess your vehicle, which costs time and money.

If you take the process one step at a time, you should be able to avoid financial disaster—even if your looming car payments look like an insurmountable problem.

The Trouble With Missed Payments

Skipping your car payments can snowball into multiple problems. Late payments or non-payments will be reported to the credit bureaus, which will severely impact your credit score. The most important factor in your credit score is your payment history, so any negative marks will have a significant impact. Each month that a payment is late adds another ding on your credit score.

Once you get behind on payments, it's difficult to get back on track, especially if you're dealing with other financial difficulties. If you fall too far behind and default on the loan, the lender will repossess the vehicle. The hit to your credit score will likely be enough to prevent you from taking out further loans until your credit is repaired, which can take years.

Working With Your Lender

Being prepared and making it clear to the lender that you are working to address your issues is the best way to find a solution. First, look at your short-term situation. When is your next payment due, and how much—if anything—can you afford? Your lender may allow you to skip a payment for a fee of around $25 to $50, to be added to your principal balance. While it's not ideal, this tradeoff can buy time to implement a long-term plan.

The details of your long-term plan will vary depending on your situation and how much your lender is willing to cooperate. If your financial situation isn't likely to improve any time soon, you might have to sell the car to pay off your loan. If your situation is temporary or could be alleviated by reducing your payments, you might be able to refinance the loan and keep the vehicle.

Don't simply volunteer to return the car to the lender as a quick solution. This will have the same negative impact on your credit rating as if the lender initiated the repossession.

Refinancing Options

Refinancing your loan basically means taking out a new loan and using that money to pay off your old loan. If your credit is good—which it may be if you acted fast and avoided falling behind on payments—you might be able to secure a lower interest rate. However, the most effective means of lowering payments is to extend the term of the loan. For example, if you still have 36 months left on your loan, you might refinance over 48 months. This method usually will increase your interest rate, but you'll end up with significantly lower payments.

Your current lender might be willing to work with you on refinancing your loan, especially if you've been a good customer and your payments have been on time. Local banks or credit unions also frequently offer refinance loans, and possibly at competitive rates.

Selling It Yourself vs. Trading In

For maximum earning potential, try to sell the car yourself. Kelley Blue Book reports that sellers can get about 15% to 25% more than trade-in value. For example, if a dealer offers $10,000, statistically you'd make $11,500 to $12,500 by selling the car yourself.

The tradeoff is the time and effort. Selling the car yourself means you have to market it through online sites such as Craigslist and follow up on inquiries. Finding buyers willing to pay market price can take time, but if you've already skipped a month of payments, it's worth using this time to get the highest bid possible.

The remaining balance on your loan is also a factor. If you're upside down (owing more than the car is worth), you'll still need to pay the remainder of your loan. You may need to dip into savings or consider a personal loan. As long as the payments on the loan are affordable, this might be a viable option because it will allow you to cover your missed car payments without causing serious damage to your credit.

Getting Out of a Lease

If you leased a car, falling behind on payments creates an entirely different challenge, but the goal remains the same: to get out of debt without damaging your credit. A lease swap might be an option, but depending on how quickly you need to make a deal, you might have to accept that you'll lose some of the money you paid up front.

Websites like Swapalease.com are similar to other online classifieds, but consisting entirely of people looking to swap leases—whether to take over a lease or get out from under one. Searchable forums include details like monthly payments, down payments, mileage, and damages, for a fully informed lease swap.

Will I Lose the Down Payment?

In an ideal scenario, when you swap out your lease, you'd get an equitable portion of your down payment back. If your lease is halfway up, then aim to get half your down payment returned as part of the swap. However, the deal must factor in mileage as well; if you've been averaging 15,000 miles per month on a stated limit of 12,000, the person taking over your lease will need to pay for those extra miles when the car is returned, which will factor in to negotiations.

Damage is accounted for just like mileage. The person taking the lease will have to pay for any issues, thus reducing the amount you can expect to reclaim from your down payment. Ultimately, any deal that eliminates payments you can't afford beats the risk of having your vehicle repossessed and your credit severely damaged.

Buying a Cheap Car

Once you sell your current car, consider more affordable options. Check out the public transportation system in your city to see if it fits your lifestyle and assess whether you really need a car. Maybe you can get by without one for a few months while saving money and digging yourself out of your financial hole.

If a car is a necessity, go cheap and try to pay in full. By shopping online, it's possible to find a reliable used car for $2,000 or $3,000. If you need to borrow money to buy a car, try to put down as much money as possible up front to keep the payments low so you don't run into the same situation again.

Many states offer tax benefits for purchasing electric vehicles. Research the laws in your state and consider your tax liability for the year to determine whether a green vehicle might help you save money in the long run. And don't forget the savings on gas!

Keep in mind that an older, used car should lower your insurance payments, thus helping to lower your total monthly expenses. This used car does not have to be a long-term solution, but you should stick with it for as long as necessary to get your finances in order.