Here’s What to Do if You Can’t Make Your Car Payment

Quick Facts About Missing a Car Payment

• Start with checking the value of your vehicle.
• Contact your lender to find out your options. 
• A voluntary surrender or repossession doesn’t absolve you from your loan or lease.

Not being able to make your monthly car payment is never a good thing. But, you may face no alternative with economic uncertainty, layoffs, and inflation.

Chief Economist Jonathan Smoke at Autotrader’s parent company Cox Automotive, says people put more money down on cars throughout the pandemic.

“This means that consumers often have more options if a loan falls into default, and lenders are more likely to work out an agreeable deal, reducing the likelihood that a repossession is the end result,” Smoke said.

We’ll break down the frequently asked questions, so you can determine what move works best for your situation.

• What is my car worth?
• Can I lower my payments?
• What are the pros vs. cons of payment deferral?
• Can I refinance the balance?
• Should I sell or trade in my car?
• Can someone assume my loan or lease?
• Should I return my car or have it repossessed?
• Is seeking bankruptcy protection a good idea?
• Should I keep my car insurance?
• How do I repair my credit rating?

Not all the answers will fit your individual needs. However, by following this advice, you can minimize the risk to your finances if you miss a car payment. Of course, you can avoid all this by buying a car within your means. But if you find yourself behind or at risk, here’s what you can do.

What Is My Car Worth?

Determining the value of your car will go a long way in figuring out your next steps. Any equity in your vehicle can be a valuable tool in negotiating with your lender on repayment terms. It can also determine whether to keep the car, sell it, or trade it in for another vehicle. The problem is that those in financial difficulty often discover they paid too much for their car or bought a model that just doesn’t hold its value. If you owe more on the loan than what your car is worth — that’s upside down.

You might also be one of the lucky few who bought a new vehicle below market value or in high demand. In that case, you may owe less than what it’s worth on the market. If that’s the case, you’re in a much stronger position to rework your loan with favorable terms.

Can I Lower My Payments?

Say you can’t make that next payment. You’ll need to contact your lender to see if other terms can be negotiated. This may be payment deferrals or lengthening the loan term to decrease monthly payments. Some banks have programs specifically designed to help those who struggle with loan repayment.

That help may take the form of allowing you to skip one payment, especially if you haven’t missed any before. However, that amount will be tacked on the end of your loan, and interest will continue to accrue during the grace period. Financial institutions are unlikely to offer this break more than once a year.

Once you know how much your car is worth, you can estimate where your payments need to be using a tool like our car loan calculator.

What Are the Pros vs. Cons of Payment Deferral?

To be able to participate in a bank or other lender loan repayment deferral, applicants need to provide a hardship letter indicating a job loss or other reasons why payments can’t be made. Usually, the bank will run a credit check, and if deferral is approved, a forbearance agreement must be signed outlining the new terms and repayment schedule. It will also include any charges or fees associated with the new terms.

Payment deferral buys time to get your finances in order. However, deferred payments are tacked on to the end of your loan. Interest continues to accrue during the extra time the loan is active, for which you will be responsible, and during the deferral grace period. You end up paying more interest on the car loan. By the time payments end, the car may not be worth as much as it would have under the original loan.

Can I Refinance the Balance?

Refinancing your car loan balance will not necessarily save you money in the current market because interest rates increased so dramatically during the past year. In the past, we would advise you to negotiate with your lender to refinance the loan balance.

Refinancing a balance works best when you start with a higher interest rate and negotiate it down to a lower one, as there may be some monthly payment savings. However, by extending the repayment period, you’ll also see a decrease in your monthlies.

Even in this scenario, you need to requalify with a credit check. If your credit score has deteriorated, you risk paying a higher interest rate.

Should I Sell or Trade in My Car?

Selling your car or trading it in for a cheaper new or used model might be an attractive alternative, especially if you’ve discovered that your vehicle has a high resale value. Remember that you will be liable for the difference between the loan balance and what you can get for your car.

The best return on a used vehicle sale is when you sell the car to a private party. But that involves more effort on your part to advertise, show, negotiate, and close the deal. A direct sale to a dealer is quicker and easier but will also return a lower price.

If you decide to trade your car for a less costly new or used vehicle, the dealer will also be able to roll the money you owe on your trade into the new deal. This adds more money to your new ride. However, if you extend the loan far enough out, you may end up having a lower monthly payment. Still, you’ll be paying far more for the car because of this added cost and the extra interest. The benefit is that you’ll still be in a car with a payment that more closely matches your ability to pay.

Can Someone Assume My Loan or Lease Payment?

If you purchased your car in the last two to three years and it has low mileage and an attractive interest rate, you might find someone to take over your payments. However, check the fine print on your sales agreement to see if a provision allows someone else to take over the payments.

Leases also may or may not be assumable. Again, this feature should be spelled out in the lease contract. In this case, third-party companies like Swapalease charge a fee to find someone to take over your lease payments.

RELATED: How to Get Out of a Car Lease

Should I Return My Car or Have It Repossessed?

Returning the car to the lienholder or having it repossessed is far from optimal. A voluntary surrender or repossession occurs when the owner walks away from the vehicle. This doesn’t absolve you from your loan or lease. The financial institution will still try to collect their money. And that balance is the difference between what’s owed and what they can get for your car, usually on the wholesale market or at auction.

In the case of a car lease, you may be responsible for the remaining monthly payments and a hefty early termination charge.

A more desperate gambit is not paying until the lender figures out they’re not getting their money back. In that case, repossessors are called into action to collect your vehicle at a time and place not of your choosing. In addition to being liable for the loan balance, you may get charged repossession fees.

In either case, you will be doing severe damage to your credit rating. You’ll find getting a loan extremely difficult. Even if you fix your credit to qualify for a loan, you’ll likely pay a much higher interest rate as a credit risk.

Is Seeking Bankruptcy Protection a Good Idea?

Not making a car payment is a sure sign of financial difficulty, and you may consider filing for bankruptcy. This approach could buy time, and you may be able to keep your car during bankruptcy. Everything depends on if you file Chapter 7, or total liquidation of assets, or Chapter 13 bankruptcy, which allows you to reorganize your debts.

However, you should view bankruptcy as a last resort. It will damage your credit rating for seven years, and the court may restrict how and where you can spend your money. Worse yet, you may lose your vehicle. It’s best to get legal advice before taking this route.

Should I Keep My Car Insurance?

Insurance can be costly, but if you’re considering not making a monthly car payment, you owe it to yourself to keep your policy current. Even if you default on payments, you’re still liable for the vehicle, whether it’s totaled in an accident or stolen.

Letting coverage lapse is a costly mistake. In addition to being out the value of your car if anything happens to it, not having insurance will make it more difficult to get and much more expensive the next time you apply.

How Do I Repair My Credit Rating?

Once you’ve weathered the financial storm, one of the first tasks you should tackle is repairing any damage done to your credit rating. First off, don’t miss any more car payments. You should also keep up payments on other loans and figure out a way to keep your debt in check.

Also, no matter how many offers come at you, don’t take on any new credit cards or accounts you don’t need. You should regularly check your credit score and update any information, especially your income, that could help raise your rating.

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• Car Payments: The Basics Explained
• Car Payment Guide: Calculating What You Can Afford
• Balloon Payments and How They Work: Car Financing Caution

Editor’s Note: This article was updated for accuracy since it was initially published.