Cars, whether new or used, are both a big responsibility and a big expense. There are many different costs to consider, such as fuel, insurance, repairs, tires, etc. Not only that, but you will also have to consider other elements; where will you buy your car, what warranty will cover it, if any, and of course, how do you plan to pay for it. Depending on your current income and the price of it, it may take years before you have the money. Thus, many potential homeowners apply for a car loan.
A car loan, like any other type of loan, is a system that allows a buyer to repay the total value of the car in monthly installments, making this big purchase possible. After all, very few people can afford a $ 25,000 car in one payment. On the other hand, when all other automobile expenses are taken into account, there are additional factors that many people forget before applying for a loan, including interest. It may be possible to pay the loan payments initially, but an unexpected situation could arise and prevent you from continuing your payments.
It could be the loss of your job, a decrease in your wages or any other financial emergency. If that’s the case, there are a few ways to deal with your car loan before it’s too late.
What is a negative equity auto loan?
First, it is good to understand one of the main reasons a borrower will try to terminate his car loan. A negative equity auto loan means that the borrower owes more to his car loan than the car’s own value, which translates into negative equity. This can happen most often with newer vehicles, as their value will decrease as soon as they leave the dealership. As and as time goes on, the car market fluctuates as well as the value of the car. This is a problematic occurrence with more expensive luxury models, in particular. A buyer will occasionally miss monthly payments in principle low, ignoring what it will actually cost in the long run.
Determine the current market value of your car
If you consider trying to break your car loan contract because of negative equity, you should get an estimate of the current market value of your car before making a decision. You can probably find a number of websites that will calculate the value of your car, depending on certain criteria such as brand, model, color etc. However, if you can also get a basic estimate by checking the mileage, the various features of your car and its current condition. Then you can browse auto classifieds and websites to compare your car with other similar cars and calculate its approximate value. Once this is done, calculate the amount of your loan payments taking into account the interest charges compared to your income. If your loan payments are worth more than the value of the car, you will need to consider other options.
Sell your car or transfer the loan
Another possible option if the cost of payments for your car becomes too much to bear is to try to sell it or transfer your loan to someone else. If you find a friend or family member who can take care of your loan payments, then it is possible for you to get a new loan and have it signed by that person.
However, some lenders do not offer this option, banks and other financial institutions included, because their regulations towards borrowers may be stricter. Since the lender already takes a financial risk by letting someone borrow them, they might not want to take someone else in charge in case the new co-signer also fails to track his payments. In fact, if you do not make sure that the new borrower signs all documents in his name, you will still be held liable in the event of defaults.
Resumption of voluntary possession
This option should only be used as a last resort. If you are unable to transfer your loan to another buyer and the payments become too important to you, you will need to contact your lender and inform them that you voluntarily choose to repossess your vehicle. Your property can be seized as security against any unsuccessful payment of a secured loan. So, if you think you are in danger of defaulting on your loan, it is best to keep your lender informed right away and to repossess your car voluntarily.
You should know that even if a repossession is voluntary, it still has consequences other than the loss of your car. First, your credit rating will drop dramatically and you will have an added rating to your credit history, which will impact your credit for years to come and prevent you from getting more loans in the future. Then, once the car is back, the lender will probably try to auction it. If the full balance of what is left over from your loan is not obtained, you will have to pay it yourself or be subject to other actions of a collection agency.
Refinancing or negotiation of a new loan repayment plan
This is probably the most reasonable and practical decision you can make if you think your car loan is costing you too much. The simplest solution is to refinance or negotiate your repayment plan with your lender, then pay the balance of your car to no longer stress you. Remember that missing payments on your loan will cause a lot of problems for the lender and will cost you money to process the repossession process or any other legal action. The simplest thing for both parties would be to find a solution where you can pay off your balance without the hassle of other solutions.
Discuss refinancing options with your lender. If the monthly payments are too high, you can find a more reasonable repayment rate based on your financial needs. You can also review your payments. Depending on your lender, you can also increase your payments or pay in several lump sums. This may seem unattractive but if you have the money available to do so, it may be better for you because you will end up paying less interest and getting out of debt faster.
Talk to your lender before making a decision
When you’re struggling financially and can not afford to pay for your car loan, the stress that comes with it can make you make rash decisions. However, the best thing to do is to stay calm and deal with the situation by talking to your lender. Since your lender will probably not want to go through the car repossession process or transfer the loan to someone else, he will be open to negotiating a solution to the problem. Most importantly, lenders want to be fully refunded, although this may take longer than originally planned.