For most of us, our car is an essential tool in our daily lives. It takes us where we need to go (most notably our place of employment where we earn our livelihood) and gives us flexibility to get around. But it’s also a financial commitment, one that is easy to fall behind on when money gets tight. But here’s the problem: take away the car, and your financial situation is immediately in jeopardy. You don’t want to let a car payment keep you from being able to get to work and earn a living. So, if your car is becoming a burden and you don’t think you can make your next payment, take a look at these options before it’s too late.
Call your lender
This absolutely must be your first step. We’ve explained this as the first step for almost every kind of debt when you fall behind–student loans, credit cards, etc.–and the advice is no different here. Your lender is in the best position to help you. It’s in their best interest for you to pay, and they will likely be able to make some arrangements to help ensure that is possible.
Lenders will commonly allow you to skip a payment and tack on the deferred amount to the end of the loan. This is something they frequently offer during the holidays, so you can likely get a similar offer at other times. The only catch is that this will cause more interest to accrue, making your total repayment more expensive. Another option that might be available is to pay lower than the full amount for a few months, which may be preferable depending on your specific situation.
The important thing to remember is to call your lender right away and explain your situation. Be prepared to plead your case and ask for an arrangement that will work for you.
Another popular option is to refinance your loan into terms that are more feasible for you on a month-to-month basis. In other words, you could bring down the monthly payment. You would likely need to extend the repayment period (which will cost you more in interest over time), but this can be a powerful strategy to keep you car and keep you afloat each month.
The only additional drawback to this approach is that it’s not available to everyone. Refinancing typically requires good to excellent credit, so it likely won’t be an option to you if you have anything less than a stellar repayment history.
If you want to learn more about your refinancing options, you might start with talking to your lender, but you can look to third parties, too. At the end of the day, you’ll want an arrangement that reduces your monthly payment, but still keeps your total loan repayment reasonable.
Move the Debt
This is similar to refinancing, but rather than getting a new auto loan, you could move the debt into a different financial product, like a line of credit. These methods may also require good credit, but in some circumstances they might be easier to qualify for than a traditional refinance.
For instance, you could use a balance transfer credit card to pick up the remaining tab of your auto debt. Essentially, you would pay the loan with a credit card and then move that balance to a card with a zero percent interest rate.
There are a few major caveats here, though. First, making a car payment with a credit card isn’t always easy. Many companies won’t accept it. So, for this to work you might need to use a third-party bill pay service, like Plastiq, that will process your payment via credit card. Services like that typically have fees (you can expect two to five percent), and you will have to pay additional fees on the actual balance transfer. All of these fees will limit the potential savings of this method, so be sure to crunch the numbers before moving forward.
Also, keep in mind that when the promotional period ends on the credit card, the rate will skyrocket. If you don’t have the balance paid in full by that point, you will likely find yourself facing a much bigger bill than before.
And one more thing–your credit score. If you open a new card and immediately load it up with a large balance, you’re probably going to hurt your credit score. FICO views installment loans (like traditional auto loans) and revolving accounts (like credit cards) differently, so that balance probably hurts you much less when it’s in a loan. If you use this balance transfer method, you will lower the average age of your accounts and increase your utilization ratio, both of which will likely contribute to a drop in your score.
Long story short, this method can work, but it has pitfalls. It’s probably best used when you can benefit from a break in payments and interest accrual but also have certainty that you will amass a lump sum to cover the total cost of the loan before the promotional period ends. Before you take this route, make sure you consider the consequences. It’s doable, but don’t let the unpredictability of a situation turn into your financial ruin.
Home Equity Line of Credit
One other method of “moving the debt” would be using your home equity (if you own a home). In this method, you would essentially take out a loan from your home equity, use that amount to pay off the car, and then make payments toward the new loan. This is tricky, and comes with its own pros and cons.
As a basic rule, it’s best to avoid this approach, because it risks your home as collateral. On top of that, two major shortfalls are that the rate on the HELOC may be variable, meaning its rates will change (and they may be higher than the rate you were paying on the auto loan), and the HELOC may outlive your car. HELOCs are typically for 25 years and, though shorter periods are offered, you will need to calculate the total cost of the HELOC and understand that you might be paying on it even after you’ve replaced your car with another one (which might also be financed, meaning you would have two monthly car payments).
However, there are some benefits and situations where it could make sense. First, even though HELOCs are designed to be long-term products, you can pay them off earlier, which means you have some flexibility. Then, there’s the tax implications. Interest you pay on a HELOC is usually tax deductible, which is a benefit you wouldn’t have on a standard auto loan.
Long story short, you need to do some careful research and number crunching before pursuing this. Here’s a great article to help explain more of the details.
Sell, Consign or Trade in
You may want to pay off the loan in full and start over with a new, more affordable loan on a cheaper car. This would be particularly helpful if you bought an expensive car that offers more luxury than you need and you can get buy with a much cheaper car for your needs. In our post about making money from a clunker, we talked about the traditional options (selling and trading in), along with a few more unusual strategies, some of which are options here too.
Selling will almost always get you the most cash, but there’s just one problem: it’s difficult to sell a car that is still financed. You’ve likely heard the term “clear title,” sometimes mistakenly referred to as “clean title.” Most buyers will only consider a clear title, which simply means that there are no liens on the vehicle and that no one other than the seller can claim ownership of it. That’s not the case when the car is financed. All hope isn’t lost, and you can sell, but you’ll need to read up on the process and need to find a buyer who is willing to navigate the process with you.
Selling to a dealership like CarMax likely won’t help you here–you may not get enough to cover the loan, and even if your loan amount is small you still have better options. Trading in might be a decent option if you can get enough trade in value to cover the loan. Even if that doesn’t happen, you might be able to roll over the remaining amount you owe into the new loan. You’ll just want to make sure the terms on the new loan are good enough that you can meet them each month. Otherwise, you’ll end up in the same situation of not being able to repay. The most important thing is to make sure you understand the dealer’s offer.
Consigning is a great option if you can keep your payments going just a little while longer. If you consign, you will be paying someone else to sell your car for you, but the idea is that you will get much more for the car than if you traded it in to a dealer, even after accounting for the fees. A good consignment company will also manage the entire transaction, which means they can facilitate the closing out of your existing loan once the car sells. This isn’t just good for you, but it’s good for the buyer too. It’s much more preferable (and realistic) than trying to sell to a private party, and will protect both of your interests to ensure a smooth deal. For someone who doesn’t have the excellent credit score required to refinance, consigning may be the most consumer-friendly option for selling a car that is still financed.
Make and Save More Money
If your fundamental problem is having enough money at the end of the month to pay for your car, there are two sides of the equation that you can address: how much money you are bringing in and how much you are spending. These come up in any conversation about debt, because if you can increase income and/or decrease spending, you’ll be freeing up resources to put toward your payment(s). Here are some tips on cutting other expenses.
Evaluate your other Debt
A key strategy is to take a look at your other debts and see what flexibility there may be. Again, your car is an important tool, a resource which may directly help you keep your job and make more money. Rather than jeopardize this asset, take a look at where else you may have flexibility. Can you defer a student loan for a few months while you straighten things out? That will cost some interest too, but might be a better alternative.
And what about your credit card debt? If your credit card monthly payments were discounted by a few hundred dollars each month, would that make your car payment more comfortable? Having lower monthly payments and interest rates on your credit cards is a real possibility with a Debt Management Program.
Your best bet might be to go through a free credit counseling session, which will help you develop a game plan. Our counselors will review your credit with you, and take a look at your particular debt repayment needs. Together, you’ll be able to develop a solution for your car payment, and work toward your long-term financial well-being.