car loan – Putting it all together in a nutshell
Debt from a car loan can be a huge financial burden. If you’re having difficulties paying your auto payments, you may be able to get some help from your lender by negotiating a new payment plan, refinancing, or selling or trading your vehicle.
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According to Federal Reserve data, the average loan amount for a new vehicle set an all-time high of slightly under $36,675 in June 2020. If you finance that amount for 60 months at 4.98 percent (the Federal Reserve’s average rate), your monthly payment might be more than $690.
When you drive the car off the lot, that cost may appear to be reasonable. However, financial challenges such as fluctuating income, job loss, unexpected medical bills, or emergency needs might make it difficult to keep up with a car payment at times.
Because auto lenders don’t want you to fail on your loan, they consider your credit history (how you’ve paid your bills on credit in the past) when determining whether or not to lend you money to buy a car. If you’re facing financial difficulties that are preventing you from making auto payments, contact your lender to see if you can work out a more affordable payment plan.
Furthermore, several auto lenders provide hardship programs, such as vehicle loan deferral, to help borrowers stay afloat until their circumstances improve during economic downturns. Keep in mind that interest rates on your loan will continue to accrue during the deferment period, and you may wind up paying more in interest.
Refinancing an auto loan, which involves replacing your current loan with a new one, can help you save money on your monthly payments. You may be able to acquire a cheaper interest rate by refinancing. Alternatively, you can request a longer payment period, which may reduce your monthly payment (calculator). However, keep in mind that extending the duration of your loan may result in you paying more interest over time.
If at all feasible, seek out a refinancing offer before your credit is harmed by financial issues. In general, having a strong credit score and a good credit history might make getting a loan with a lower interest rate and better terms easier.
Is it a good idea to refinance my car loan?
When you’re still owing money on a car, it’s a bad idea to sell or trade it.
Another option for lowering or even eliminating a car payment is to sell it (in English) or trade it in for another. You may be able to earn more money for your vehicle if you sell it yourself rather than trading it in at a dealership.
Trading in your present vehicle for a new one to avoid a high car payment makes sense only if your credit is good and you don’t owe more on your loan than the car’s value (known as “being upside down”). You may be able to trade in your current automobile for something less expensive or with reduced financing expenses if you’re upside down on your loan, but your old loan balance will almost certainly be included in your new one. This raises the possibility that your new car loan will be in default as well.
The consequences of a car loan default
When a vehicle loan is considered in default, the laws differ by state and lender. However, the outcome is often the same: the lender keeps the vehicle, his credit falls, and he may still owe money to his lender.
Doing everything you can to prevent defaulting on an auto loan is probably a good idea.
What you should know about car repossessions
If you fall behind on your car payments, your lender may be able to repossess the vehicle. The time it takes for a financial institution to repossess your vehicle after you’ve been late varies by state, as does whether the institution must notify you first.
You may believe that allowing the lender to repossess the vehicle or returning it willingly before it is repossessed will resolve your payment issues. However, you may face substantial financial consequences in the future.
On credit reports, late payments, defaults, and garnishments can all appear. And, even if your lender decides to sell your repossessed car to recoup some of the money you owe, they can still take you to court to force you to pay any deficient balance—that is, the difference between the remaining balance on your auto loan plus the repossession costs—and the amount your lender made from the sale of your repossessed car.
Steps to take next
If your monthly automobile payment has become a financial burden, you may be able to get some help with your auto loan debt. The first step should be to contact the loan company and seek for assistance; repossession should be the final resort. However, there is no such thing as a one-size-fits-all financial scenario, so be sure to look into all of your possibilities.
Author information: Credit Karma’s tax editor is Evelyn Pimplaskar. Evelyn has written on practically everything in her nearly 30-year career in media, marketing, public relations, and journalism, from newspaper coverage of salacious… Continue reading to learn more.