Cars are expensive. They depreciate rapidly, and that makes them a terrible “investment”. In many families, cars are among the priciest purchases made, often second only to housing. Most people can’t pay for a car out of pocket, new or used; approximately two-thirds of car buyers finance their purchase. As a result, car loans account for more consumer debt than anything else except housing and student loans. This is big business.
But many car buyers are struggling with the monthly payments on their car. Others owe more than it’s worth. Some are ready for their next car but haven’t paid off the current one yet. Are you one of them?
You have options.
The first thing you should do is find out what the car is worth. Services like Kelley Blue Book or Edmunds can give you a free and accurate estimate of what your car is likely worth if you provide information like make, model, year, options, and overall condition. Compare that number with the balance remaining on your loan. If you’re lucky, the car is worth the same as or more than the balance left, meaning you can sell the car, pay off the loan, and be done with it. You won’t have the car, of course, but you won’t have the monthly payment either.
But what if the car is worth less than what you owe? This is called “negative equity” or “being underwater.” You could keep the car and continue to struggle with the payments. Eventually you will bring the balance down to zero or close to it and no longer be underwater; when you get to that point, you can sell the car and pay off the loan.
If that is not appealing, you have additional options. Your could contact the lender. Explain the situation and ask if they can help. Perhaps they will refinance the loan, giving you a lower interest rate or a longer term, both of which would result in a lower monthly payment. (But keep in mind that a longer term puts you in danger of being underwater again.) If your current lender won’t offer you any relief, try your local bank. Although big chain banks are unlikely to give you a new car loan in this situation, small town banks and credit unions are more flexible. They might give you a new loan, on more favorable terms, which you can use to pay off the original lender. Just remember, you can’t borrow your way out of debt.
If you can’t change the loan with either the current lender or a new one, you still have options, although they are less appealing.
- You could find someone who wants your car and have them assume your loan. You have to discuss it with your lender, but you essentially hand off the car someone else and hope they make the payments. The risk here is that you are still legally responsible for the payments, if the buyer stops paying. And it might be hard to find someone who wants to jump into your shoes – paying more for a car than it’s worth.
- You could voluntarily surrender the vehicle. Call the lender and tell them to come get the car. The lender will then sell it, and you will still be on the hook for any remaining balance. Since you are likely going to sell the car for more than the lender would, this is not a great plan unless something in your personal circumstance precludes you from selling it yourself. In this scenario, your credit score will take a hit as well, making it even less appealing a prospect.
- You could also go to the dealer and trade it in for a new car. That seems like the best of both worlds, right? It’s not. The dealer will roll your remaining loan balance on the first car into the loan amount of the second car. You’ll be paying for two cars and driving only one, plus you’ll wind up underwater on the second car even sooner.
- How long ago did you buy the car? If it’s only been a very short time – less than 90 days if not sooner – you could drive it back to the dealer and ask to be let out of the loan. This is unlikely, although you improve your odds if you simultaneously buy another car from them.
- Is your car a lemon? A new car with multiple and severe mechanical issues might qualify as a lemon, and every state has specific laws (“lemon laws”) to protect consumers who wind up with one. If your car has serious and unfixable issues, you may be entitled to a replacement vehicle. Look into your state’s laws and if you think you’ve got a lemon, talk to the seller.
- You could just stop payments on the loan. Eventually, the lender will send someone to repossess the car. You’ll then have no car, a massive hit to your credit score, and still be on the hook for the payments and your account sent to a collections agency.
Another instance in which you’ll want help from an attorney is if you think you were taken advantage of by the lender. Did you ever really understand your loan? Did the lender promise one thing but provide another? Loan documents can be long, confusing, and boring, and they offer plenty of opportunities for unscrupulous lenders to deceive naive borrowers. If you’ve ever thought your loan is just wrong or unfair, you may have been the target of predatory lending. The federal government and all 50 states have laws against deceptive and unfair lending practices. The best way to figure out if you’ve been a victim is to consult with an attorney.
Another option you might consider is filing for bankruptcy. This is usually the quickest and easiest way to get out from under a bad car loan. Once you file bankruptcy, the creditors are prevented, temporarily, from repossessing the car. This gives you time to get a replacement vehicle. Once you have done that, you simply return the car to the lender, and discharge the debt.
Are you worried that you won’t be able to get another car after you file bankruptcy? Don’t be. Car dealers market heavily to people going through the bankruptcy process. They know that you are getting rid of all your other debt, so you could afford payments. I can show you how this works. If you are stuck with a car loan you can’t afford, or if you are overwhelmed with debts, I can help. I work with people every day to use the bankruptcy system to eliminate their debt and recover financially. Call me today to schedule a complimentary strategy session. I will discuss your options, and show you how bankruptcy can help.