Whether it’s due to the rising cost of living or a significant life change such as divorce or job loss, you might find yourself in a position where you are no longer able to pay your auto loan instalments. So, what should you do if this happens?
Last but not least, don’t bury your head in the sand. It’s doubtful that your financial situation will get better if you ignore it. Not only will you be digging yourself deeper into a hole due to late payments, but your credit score will also suffer as a result of non-payment, making obtaining credit later on more difficult and expensive.
Examine your financial situation
So, you’re having trouble making your car loan payments. What should you do? To begin with, take a look at your finances. Create a budget to see where you stand financially by taking into account all of your incomings and expenditures.
TIP: To make budgeting easier, use a financial planning program to assist you. Many of these apps link to your bank accounts and credit cards, making it simpler to track both where the money comes from – and where it’s going.
Next, look at your credit (all three Australian credit reporting agencies provide this service for free). If you need to renegotiate or refinance your automobile loan, having a greater understanding of your credit will put you in a stronger position. Finally, compare car loans to see how they stack up against one another in the market.
Contact your lender
Even though you may find this surprising, most lenders want to assist borrowers who are having difficulty repaying their loans. So, whether you find the call difficult to make or not, if you think you might fall behind on your payments, you should contact your lender as soon as possible.
Armed with the information you have acquired about your present financial status, you can speak to your lender about your alternatives.
Your lender may reduce your payments, extend the time you have to pay back the loan, or give you a repayment holiday. Alternatively, they may provide you with extra time to pay back the money so that you can get on track again before your monthly instalments resume.
Renegotiate your Car Loan
If you find that these quick-term solutions aren’t providing long-term benefits, it may be worth discussing with your lender about renegotiating your vehicle loan.
You may be able to get a lower interest rate if you’re in a better financial position. This will usually only apply if your credit score was lower when you initially applied for your automobile loan. Alternatively, you might be permitted to extend the term of your loan.
The choice is yours. You may borrow less by paying more each month, or you can pay more but take out a longer loan term. Both options will result in reduced monthly payments over the length of your loan, allowing you greater flexibility in your budget. However, it’s worth noting that if you extend the amount of time it takes to repay your debt, you’ll pay extra interest overall while still owing money.
Refinance your Car Loan
You may discover that refinancing with another lender will allow you to obtain a better car loan rate than the one offered by your bank. With that in mind, there are two things to consider before refinancing.
1. Your capacity to obtain a loan: If your recent money problems have caused you to miss a car loan or other credit payments, your credit score may be lower than it was previously. Similarly, if your financial situation has altered, for example, if you lost your job or took a pay cut, potential lenders will assess your application differently.
You may have a harder time obtaining approval for a loan when you refinance if your credit score or financial position is lower. If you’re accepted, your lender might impose a higher interest rate on you, potentially making the payments on your new loan more expensive than the current.
TIP: Know that the advertised rate is not always the rate you will pay when comparing automobile loans. Depending on your credit score, financial position, and employment status, the lender will determine your interest rate on your application.
2. The potential expense of terminating your current loan: Another factor to consider before refinancing is the possible cost of ending your present loan early. Most automobile loans are secured, which means that exiting early may result in hefty penalties. Find out how much you will have to pay and consider it in your decision to refinance.
Sell your Car, If Needed
If you simply can’t afford to keep your car, you may sell it in order to pay off your auto loan. If you opt for this path, be sure to notify your lender that you plan to sell the automobile and inform the potential buyer that the vehicle is still under finance.
You may find yourself with additional money after you’ve paid off your loan and any applicable fees, based on how much you owe on your automobile and how much it sells for. This is yours to do as you like. If the sale of your automobile doesn’t cover the rest of the outstanding amount on your loan, you’ll have to come up with another solution.