As average auto loan costs soar, more Americans are missing their monthly payments — a move that can tank your credit score. But there are steps you can take to avoid the negative impact of falling behind on a car loan.
The rate of new auto loan delinquencies reached 7.3% in the second quarter, exceeding pre-pandemic levels, according to a Moody’s report based on New York Fed data.
A car loan is considered delinquent when a payment is more than 30 days overdue. That’s when your lender will likely report the account to the credit bureaus, which can lower your credit score. Having a bad credit score means it'll be more difficult to get approved for auto loans, mortgages and credit cards, or the interest rates on loans you qualify for will be higher, among other ramifications.
The best way to avoid delinquency and its harmful effects on your credit is to find a way to make on-time payments. Before considering any other options, review your finances and budgeting to see if you can come up with the money. But if you can’t reduce your spending or increase your income enough to cover your car payments, there are still options available.
What to do if you can’t make car payments
Here are four things you can do if you’re worried about falling behind on auto loan payments:
Contact your lender
If possible, initiate a conversation with your lender before the payment due date. If you’re not going to be able to pay, try to work out an arrangement instead of risking damage to your credit, says Thomas Belding, a financial planner based in Chatham, New Jersey.
“Communicating with the lender is always a good idea if there's any chance that you're going to have trouble fulfilling your obligation, and they usually will want to work with you because they want their money. They don't want to get into a situation of having to recover the car or anything like that,” he says.
Your lender may be able to simply change your due date, giving you a bit more time for a paycheck to come in if that’s all you need to get back on track.
Ask about deferring car payments
In a situation of more serious financial hardship, you can see if your lender has any options for deferring payments.
Some lenders will work with customers and let them skip a payment or two without fees or penalties, according to Experian. If you get a deferral, however, you may need to pay the interest for those months, and you’ll still have to make up the payments at the end of your loan period.
Extend your auto loan
When you talk to your lender, ask if it’s possible to modify your loan. If you can document your hardship, there may be a way to restructure the loan so you can make smaller payments over a longer period.
Alternatively, you can see if your lender can put you on a payment plan to temporarily reduce your payments. Be aware that after a payment plan period ends, you must resume paying your monthly bill plus a portion of the payments you missed, according to the Consumer Financial Protection Bureau.
The other approach to extending your loan or changing the terms otherwise is auto loan refinancing. Refinancing means you’ll have a new loan with different loan terms, so you should comparison shop car loans from multiple companies if you go this route.
There are several reasons someone might refinance a vehicle, but a common one is to get a longer loan term with more affordable monthly payments. Keep in mind that there are drawbacks, including paying refinancing fees and the potential for a higher interest rate on the new loan. You'd also probably find yourself on the hook for the loan for a longer period, possibly even past the time that you’ll be driving the car.
Consider selling the car
Depending on your situation, selling your car may be a better option than missing payments. If you miscalculated your budget or your financial situation changed, you could be better off switching to a cheaper vehicle or not owning a car at all and relying on other transportation options.
It gets tricky, however, when your vehicle isn’t worth as much as your loan balance. “You may not be able to recover enough to pay off the car,” Belding says.
If you were to sell your car for less than you still owe, you would have to pay the difference, which might not be viable if you’re falling behind on monthly payments. You could try to roll over the negative equity to a new loan on a more affordable car, but this risky as well because you would immediately be upside down on the new loan. But, depending on your situation, this may be best — or, rather, least bad — option for you.
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