Your car loan or lease payment is busting your budget every single month and you just can’t take it anymore.
You want out. What should you do?
Start by taking a deep breath.
Yes, you’ve put yourself in a difficult financial situation, but there are ways out.
You can undo a bad auto financing decision. But you’ll need to tread carefully if you want to minimize the hits to your wallet and your credit rating.
First off, how much is that monthly car payment really hurting your budget? Do you really need to drop the loan entirely, or could you get by if the payment was $50 to $100 lower each month?
Reining in discretionary spending and refinancing your loan may be all you need to do.
Be sure to check in with Bankrate’s Frugal U. section for additional savings strategies and tips from readers.
Refinancing may be an option, especially if you’re paying a sky-high interest rate.
But before you start shopping for a new loan, you need to take a close look at the loan you already have. Does your current loan charge prepayment penalties? Some loans smack borrowers who pay off a loan early with fees ranging from $25 to $200. How is the rate on your current loan calculated? Is it calculated with simple interest?
Refinancing makes the most sense and yields the biggest savings when a simple interest loan with no prepayment penalties is refinanced into a simple interest loan with a lower rate. Bankrate.com’s article on auto refinancing will show you how to land a good deal.
Redoing the deal
Another strategy for cash-strapped auto borrowers is to negotiate a new payment plan with your lender.
Take a close look at your finances and estimate what kind of monthly payment you will be able to stick to for the duration of your loan. Next, arrange a meeting with your lender.
“Have a proposition other than, ‘I can’t make my payment,'” says Steve Rhode, president of Myvesta.org, a financial crisis and treatment center. “You want to be able to provide proof of what you can do.”
Rhode recently helped a client who was three months behind on minivan payments to negotiate a new payment plan. The lender tacked the three months of missing payments on to the end of loan and allowed the borrower to skip a payment the next month. After that, only on-time regular payments would be accepted for the remainder of the loan.
It’s best to negotiate a new payment plan before you get behind on your loan. If you wait until after your payments are late you may not have a vehicle to drive.
“Some auto creditors repossess awfully fast, so if you wait too long the car won’t be there,” says Jonathan Sheldon, a staff attorney at the National Consumer Law Center.
You’ll be stuck with auto payments, banged up credit and no car. So the sooner you negotiate a new payment plan with your lender, the better off you’ll be.
By agreeing to a new repayment plan the lender is essentially doing you a favor. A lender could just as easily say ‘no’ and hold you to your original payment plan. Be prepared for either outcome when you step into a lender’s office.
If a lender should agree to modify your original loan contract, be sure to get the details in writing. A handshake just isn’t good enough.
Selling your car
If you’re prepared to give up the car, you may want to consider turning your loan and car over to a friend or family member. The new owner will have to be approved by your lender.
“Certainly it would be fine as long as it’s OK with the creditor,” says Sheldon, a principal author of Surviving Debt: A Guide for Consumers.
“The creditor might not agree to it. It’s up to the creditor, it’s not up to you.”
Another strategy is selling the car on your own. Because you don’t own the car outright, you’ll need to get permission from your creditor first.
“The company has a lien on the car and you can’t just do whatever you want,” Sheldon says.
Contact the creditor and let them know you’re interested in selling the car and ask about the transfer process and paperwork, including the credit application a potential new owner would need to fill out.
“Generally, it’s a new credit application. Essentially they’re just buying the car and getting a new loan,” Rhode says.
By selling the car yourself, you’ll be doing yourself a huge favor. You’ll get a much better price on the car by selling it in a private sale. If your turn the car over to your lender, the car is likely to be sold for a very low price at a repossession sale.
Keep in mind that you’re on the hook for whatever amount you owe on your original auto loan. The closer the sale price of the car is to the amount you owe, the less money you’ll have to fork over to the creditor after your car is gone.
Leave the sale of your car to a creditor, and you’ll end up paying through the nose.
“When they sell it they’ll sell it for virtually nothing,” Sheldon says.
You could get stuck making several thousand dollars of payments on a car you no longer own. If you’re unable to make these payments, your lender is likely to sue.
“You’ll meet your lender in court,” Rhode says. “They will take you to court.”
You can save yourself some serious cash and a whole lot of hassle by selling the car yourself.
Car owner’s dead end
You should consider turning your car over to your creditor as your absolute last resort. The only way to make this unfortunate situation more bearable is to negotiate.
Ask your lender if by turning over your car voluntarily you could be cleared of your loan obligation. Be sure to get any kind of compromise in writing. You might also want to request that your creditor not report your inability to pay your original loan to the credit bureaus.
By turning in the car, you’ve saved your lender the cost and hassle of repossession, so you may be able to strike a more favorable final pay off amount. It’s definitely worth a shot. But chances are your lender will sell the car at a very low price and come after you for the difference.
Still, it beats having your car towed away by your creditor.
“If it comes down to giving the car back or them coming to get it, give the car back,” Rhode says. “The more control you have over the situation the better. You don’t want to come out of your house to go to work and have no car.”
Plus, the lender is likely to charge the costs of repossession, including towing and storage, right back to you. You can spare yourself hundreds of dollars in repossession fees by delivering the car to your creditor.
For more information on vehicle repossession, check out this consumer brochure from the Federal Trade Commission.
Breaking a lease hurts
Thinking about ending a lease early? Think again.
The costs of ending a lease early are so steep that you should do everything you possibly can to make your scheduled payments through the end of your leasing term.
Are there other places in your monthly budget where you can free up some more cash? If so, do it. Do whatever it takes to free up enough money to make that leasing payment.
If you’re still struggling to make your payment, contact your leasing company and ask for a lower monthly payment. Be upfront about your financial situation. Have a monthly payment amount in mind that you’ll be able to pay through the end of the lease. Be sure to get any changes to your original lease contract in writing.
Because you don’t own the car, you have far fewer options for cutting short a bad lease deal.
“A lease is really nothing more than long-term rent,” Rhode says. “You have no asset you can sell.”
And if you turn the car in early to the leasing company, you’ll be on the hook for some serious cash.
You may be required to make all the remaining lease payments, even though you’re returning the car. Some leasing companies charge an early lease termination fee and disposal fee as well.
“Leasing companies come up with outrageous formulas to charge people many thousands of dollars,” Sheldon says.
A final option is to transfer your lease to someone else, but this won’t be cheap or risk-free either.