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 do not have the money to make a payment, address it with a call to 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 do not want to repossess your vehicle because the process costs them time and money. It's beneficial for them to work with you on both a short-term and a long-term plan to help you stay current on your payments. 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.

Missed Payments

The alternative to not working with your lender is not making your payments, which can snowball into multiple problems. Late payments or nonpayments will be reported to the credit bureaus and 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.

Once you get behind on payments, it's difficult to get back on track—especially if you're dealing with other financial difficulties. Each month that a payment is late is another ding on your credit score. Falling multiple months behind has an even bigger impact, and 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, you have to look at your short-term situation. When is your next payment due, and how much—if anything—can you afford? All lenders are different, but some may allow you to skip a payment for a fee of about $25 to $50 that they'll add to your principal balance.  While you don't want to add to the total amount of your loan, this tradeoff can buy you 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 work with you. If your financial situation does not look like it is going to improve any time soon, you'll almost certainly have to sell the car for at least enough money to pay off your loan. If your situation looks to be temporary or is simply a matter of 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 and easy 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 you are taking out a new loan and using that money to pay off your old loan. If your credit is good—which it might be if you acted fast and did not allow yourself to fall behind on payments—you might be able to get a lower interest rate when refinancing. The most effective means of lowering payments, however, is extending 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 still are likely to 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. It's also worth it to check with a local bank or credit union to see what they can offer you. If you already are a customer in good standing with them, they may be willing to refinance your loan at a competitive rate.

Selling It Yourself vs. Trading In

Your best option is to try to sell the car yourself. Kelley Blue Book reports that sellers can get about 15% to 25% more than what they would get in trade-in value. For example, if the most a dealer is willing to offer you for your car is $10,000, you might be able to get as much as $11,500 to $12,500 for the car if you sell it yourself.

The tradeoff is the time and effort. Selling the car yourself means you have to market it through online sites such as Craigslist or otherwise try to find a buyer. Finding any interested buyers willing to pay market price will likely take time. If you bought yourself a month or two of time with your lender by skipping a payment, it's worth it to take the time to get as much money as you can.

The remaining balance on your loan is also a factor. If you're upside down (you owe more than the car is worth), you'll still need to pay the remaining amount of your loan. If you have savings, you might need to use a portion of that. If you don't, you may need to 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 get out of the car payments you could not afford without doing serious damage to your credit rating.

Getting Out of a Lease

If you have leased your car, not being able to afford the payments is an entirely different challenge, but you still have the same goal: Get out from under the lease 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 on the lease.

Websites like Swapalease.com are similar to online classifieds sites, but they consist entirely of people trying to swap leases—whether they are looking to take over a lease or get out from under one. The basic starting point for swapping a lease is the monthly payment. Whoever is taking over the lease, takes over the payments. Other key factors include down payments, mileage, and damage.

In addition to your monthly payment, you likely made a down payment on the lease, as well. For example, if you are halfway through your lease, then you would like to get as much as half your down payment back as part of the swap. However, if you are limited to 12,000 miles per month and you've been averaging 15,000 miles, the person taking over your lease will need to pay for those extra miles when the car is returned, so that will lower the amount of the down payment you can expect to get back.

Damage is a similar factor to mileage. The person taking the lease will have to pay for any issues, so those costs also will be a factor when negotiating the deal. Ultimately, though, any deal that allows you to be free of the payments you could not afford is better than being in a situation where you are at risk of having a vehicle repossessed and your credit severely damaged.

Buying a Cheap Car

Once you sell your current car, consider buying a less expensive one if it's necessary for your everyday life. Be sure that you need one, though. Check out the public transportation system in your city to see if it's a viable option, and decide if you really need a car or if you can get by without one for a few months while saving money and digging yourself out of your financial hole.

You should try to buy the least expensive car you can for cash. By shopping online, it's possible to find a car that is reliable for no more than $2,000 to $3,000 or even less. If you need to borrow to buy a car, try to put down as much money as possible to keep the payments low so you do not run into the same situation again.

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.

Article Sources

  1. Congressional Research Service. "Consumer Credit Reporting, Credit Bureaus, Credit Scoring, and Related Policy Issues," Page 7. Accessed March 11, 2020.

  2. Kinecta Federal Credit Union. "'Skip A Pay' Frequently Asked Questions," Page 1. Accessed March 11, 2020.

  3. Experian. "What Happens If You Defer a Car Payment? - How Does Deferring a Car Payment Work?" Accessed March 11, 2020.

  4. Bank of America. "How Car Loans Work."Accessed March 11, 2020.

  5. Kelley Blue Book. "10 Steps for Selling Your Car - Sizing Up the Buyer, Sizing Up the Seller." Accessed March 11, 2020.

  6. Consumer Financial Protection Bureau. "Take Control of Your Auto Loan: A Step-by-Step Guide," Page 9. Accessed March 11, 2020.

  7. Carfax. "5 Ways to Get Out of a Lease Early - 5. Swap the Lease to Another Party Via the Internet." Accessed March 11, 2020.

  8. Allstate. "Insurance Considerations for Older Cars." Accessed March 11, 2020.