If you’re struggling to keep up with your monthly car loan payments: don’t worry, it’s more common than you think. In this article, we’ll cover the possible solutions to help you or anyone you know with managing bad car loans. We hope that after reading through the article, you’ll feel a lot more in control of your situation and what your next steps should be to significantly improve your financial situation.
With the average monthly car payment in the U.S. amounting to 576 U.S. dollars in the fourth quarter of 2020, it’s no wonder that many people are finding it difficult to settle their debts.
Understandably, unexpected events in life events that are entirely out of our control happen to all of us. Consequently, many people fall into financial hardship and find themselves with a mountainous pile of debt. Let’s see the possible solutions!
What is a car loan?
Before going through bad car loan solutions, let’s quickly go over what car loans are and how they work. If you’re already knowledgeable about this, please feel free to skip this section.
As a short summary, when a financial lender provides you with a loan on a car, they’ll secure it against the approximated value of the car so that you can buy it. The car is therefore used as collateral, which means that if you were to consistently default on your payments and demonstrate that you could longer consistently meet your monthly repayments, your lender would have the right to repossess your vehicle and sell it in order to recoup as much of the original loan amount as possible.
The payable interest on a purchaser’s loan is entirely dependent mainly on their credit score and the individual deal they’ve agreed with a finance company or salesperson.
What does a bad car loan look like?
So, with the above in mind, what exactly makes a car loan bad? Surprisingly, they’re quite common and easy to accidentally agree to. Many people get swept up in the excitement of owning a new car and, consequently, overlook just how much their monthly payment, with the additional interest, will actually cost them over the span of the entire loan (which is, on average, 3 or more years).
Additionally, prior loans that were once within someone’s price range can turn sour. This could be as a result of a purchaser losing their main income stream, such as their job, meaning they can no longer meet their monthly payments.
What are the solutions for getting rid of a bad car loan?
It’s important to note that serious financial and debt struggles are absolutely nothing to scoff at. They can be seriously detrimental to somebody’s overall well-being and mental health if they’re not dealt with.
So, if you are feeling completely overwhelmed by a daunting car loan, in addition to some of the solutions we’ve listed below, please don’t be afraid to seek out professional finance and mental health advice.
1. The first thing you should do? Negotiate with your lender
Before dong away with your loan entirely, it’s highly recommended that first speak to your car loan lender and see if you can re-negotiate your previous agreement.
You’d be surprised by how understanding and forgiving many lenders can be, so it’s always worthwhile being honest and upfront with them about your financial situation.
For instance, if you can prove to your lender that your financial challenges are temporary, you may be able to negotiate a forbearance. This would pause your monthly payments for a short period whilst you find another income stream to pay your lender.
Even if forbearance isn’t possible, many lenders can temporarily decrease your monthly payments, or at the very least make them more manageable, whilst you find an alternative way to pay.
2. Try refinancing your loan
If you’re unable to negotiate a better deal with your lender on your current loan, the next best step could be to refinance.
Refinancing is especially advised if your credit score or the market interest rate has improved as you may be able to strike a better deal on your next loan amount.
The main pro? Reduced monthly payments
Refinancing your current loan agreement usually means you’ll extend your loan term agreement to spread out your monthly repayments.
This would mean that your monthly repayments would be reduced as it’s spreading out your payments over a more extended period of time in comparison to your original loan period.
The main con? Increased payable interest
The unfortunate downside of extending your term is that you’ll ultimately end up paying more in interest over the entire course of your loan. Therefore, it’s only advisable to do this if you have a ‘Great’ or ‘Excellent’ credit score, where your interest is as low as possible.
If from reading the above you think that refinancing is a good fit for your bad car loan situation, it’s highly recommended to shop around and compare deals offered by different lenders.
Many comparison websites such as Comparethemarket or Uswitch exist so you can achieve the largest savings possible on your next refinance deal. However, it’s also important to consider all the administrative fees that may be associated when refinancing your current loan.
3. Move your debt to a balance transfer credit card
If for whatever reason refinancing doesn’t work, another option could be to move your entire debt onto a balance transfer credit card.
The main pro? 0% APR promotions
Even if a credit card comes with a higher rate than your current car loan, you may be able to take advantage of a 0% APR promotional period that many credit card companies often offer in your first year. Although in many instances, some can even be as long as 18 months.
By transferring to a credit card, instead of owing a larger sum usually required by a car loan, you’ll only be expected to pay the minimum monthly repayments, which gives you more flexibility and space in your budget.
The main con? Must have an already good credit score
This option might not be the best if you have a poor credit score or low income, as you will find it more difficult to successfully apply for a credit card with a high enough limit to pay off your car loan with favourable rates.
4. Consider trading in your car for a less expensive one
If both refinancing and moving your debt onto a separate credit card are not an option, many lenders allow you to downgrade to a less expensive used car and use the difference in value to significantly reduce your debt balance.
The main pro? You can significantly reduce your loan
Although it’s not ideal to trade down your car, it might be necessary if you’re in real financial hardship. If your lender agrees, you may be able to put a serious dent in your bad car loan.
The main con? You’ll have a less expensive car
Of course, the main drawback of trading in your car is that you’ll have to sacrifice the comfort of your original, likely newer and more expensive car. However, if that means reducing your overall bad car debt? It’s totally worth the sacrifice.
If all else fails, it’s probably time to sell
If you’ve exhausted all the other possible solutions provided above, it may be time to sell your car and cut the losses. Obviously, this is only advised if you’re willing to take the most radical solution.
Yet, selling your car may not even be possible if you desperately need it to commute to work or transport your family. What’s more, selling your vehicle may not even guarantee you completely pay off your loan, as it’s possible you may still have a sizeable amount of interest that’s accumulated throughout your loan term. However, sadly, you may end up losing your vehicle anyway if you can’t reasonably keep up with your monthly repayments.
So at least by selling the vehicle on your own terms, ultimately, you’re more in control of the process than if your lender were to demand to repossess it. Perhaps even more importantly, you’ll save your credit score from taking a massive hit by taking action sooner rather than later. To conclude, we hope this article has helped provide you with some possible options for helping you get rid of a bad car loan. Please do try some of the methods listed above, such as negotiating with your lender, refinancing or trading in your current car for a more expensive one.
If none of these prior things works, it may be time to sell and get rid of that bad car loan as soon as possible. Most people would agree that relieving the stress, anxiety and overall fear associated with a bad car loan is worth far more than owning the car itself!