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Car loan modification: What it is and how it works

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Are you experiencing financial hardship and struggling to afford your car payments? If your lender offers modifications on car loans, you could get some much-needed relief in one of a few forms. Plus, you could possibly avoid damaging your credit score or having your car repossessed.  

What car loan modification is 

As the name implies, a car loan modification entails changing the terms of your loan. The lender may agree to lower your interest rate, defer your payments in the short term or change your payment due date so it works better for your budget. You could also get an extended loan term, which stretches the balance of your loan out to lower your payments. But extending the term also means the lender has more time to collect from you, so you’ll pay more in interest unless you get back on track and pay the loan off early.  

Loan modification is not readily available to all borrowers, though. While lenders generally aren’t fond of repossessing the vehicles of borrowers who’ve defaulted on their loans, you’ll have to plead your case. Part of that is convincing the lender that you won’t be able to repay what you owe unless they agree to modify your loan.  

How to get a car loan modified 

You’ll need to contact your lender directly to discuss your situation and determine your eligibility for a loan modification. Be mindful that your lender will typically review your payment history before deciding. It’s worthwhile to reference that you’ve been a good customer and managed your loan responsibly. 

Follow these steps to get your car loan modified by your current lender:  

  1. Call your lender right away: Let your lender know that you risk falling behind on payments as they’re no longer affordable. The representative may share temporary options for relief but ask to speak with someone who can further assist you as you’re seeking a long-term solution. 
  2. Put your request in writing: If loan modification is available, you’ll typically be required to put your request in writing. You’ll submit the request to the lender, along with proof of your hardship and any other information or documents the lender requests. 
  3. Confirm receipt of your hardship request: Once you’ve turned all the documents in, it’s time to wait for a response from the lender. In the meantime, try to pay what you can and keep the team helping with the modification in the loop. 

How to know if you should modify your car loan 

Consider modifying your car loan if your financial situation has suddenly changed due to a job loss, temporary layoff or furlough, medical emergency or another circumstance out of your control. It could also be a smart financial move if you’ve recently experienced reduced wages.  

You may also want to explore a loan modification if your car is worth far less than what you owe. This means you’re upside down on the loan. Selling it to get a more affordable vehicle would prove to be rather challenging and could cost you a fortune.  

Auto loan modification vs. refinancing 

It’s easy to confuse auto loan modifications with refinancing, but the two aren’t quite the same. Both can possibly get you a lower payment. But unlike auto loan modification, refinancing your loan involves swapping your current loan for a new one with different terms.  

You’ll likely need good or excellent credit to qualify, and you’ll have to go through the same application process as you did when you took out your current loan. Most lenders also require that the mileage on your car not exceed 100,000 miles, and you probably won’t qualify if your vehicle is more than 10 years old.  

When your application for the new loan is approved, the lender will pay off your old loan, and you’ll resume payments with the new lender. But with a car loan modification, you’ll work with your current lender throughout the entire process.  

The bottom line 

It can be stressful if you can’t afford your car payment and aren’t in a good position to refinance, but don’t quite have the option to go without a car. Consider reaching out to your lender to request a car loan modification. If it’s not an option, it may have other programs to help you find relief until you get your finances back on track.  

 

Written by
Allison Martin
Allison Martin's work began over 10 years ago as a digital content strategist, and she’s since been published in several leading financial outlets, including The Wall Street Journal, MSN Money, MoneyTalksNews, Investopedia, Experian and Credit.com.