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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 may be able to get some much-needed relief. Loan modification involves adjusting your monthly payment amount, due date or sometimes your interest rate. When you are behind on payments, these options can help you 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.

It’s also possible to get an extended loan term, which stretches the balance of your loan out to lower your monthly payments. But extending the term also means the lender has more time to collect from you, so you’ll pay more interest overall, 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 the lender who originated the loan directly to discuss your situation and determine your eligibility for a loan modification. Be mindful that lenders 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.

Call your lender right away

Let your lender know that you risk falling behind on payments as soon as you know they’re no longer affordable. Explain your circumstances and why you are struggling to make payments. 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.

It’s a good idea to explain that you want to keep the vehicle but need help accomplishing that goal.

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.

Give the lender as much detail as possible about your situation. If you lost a job or experienced some other significant or unexpected life change, share that information in your hardship letter. It is also a good idea to explain how the modification will help, such as allowing you to continue making payments or make payments on time.

Your lender may also require financial documentation such as copies of your monthly bills and bank statements or pay stubs.

Confirm receipt of your hardship request

Once you turn all the documents in, it’s time to wait for a response from the lender. In the meantime, try to pay what you can as repossession can still take place while you are awaiting a decision on loan modification.

Keep the team helping with your modification in the loop, explaining that you are still trying to make payments even amid financial challenges.

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 have 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 does 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.

Ask about reduced monthly payments, a decreased interest rate, or even an alternate monthly due date if that will help you make payments on time. If modification is not an option, there may be other programs to help you find relief until you get your finances back on track.

Learn more

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.
Edited by
Auto loans editor