Out Of Control Car Payments
First, let’s take a look at how your auto loan payment got out of control in the first place. As the saying goes, if we fail to learn from our mistakes, we are doomed to repeat them. This could not be more true when it comes to finances.
Did you finance negative equity?
Dealerships and even many lenders are all too willing to allow you to finance your negative equity into a new car loan. This can add thousands of dollars to the balance of your loan, driving up your auto payment, making it too expensive. On a 5 year auto loan, every $1000 you add to the loan balance will add roughly $20 a month to your monthly payment.
If you add $4000 in negative equity to your loan, that is an extra $80 added to your monthly payment. This is money that might seem trivial when you first get your new car, but as that car ages, it will become harder and harder to justify.
You should only trade in a vehicle that you are upside down on in an emergency. If your cars transmission is on its way out, that is one thing. If you just want something new and shiny, that is an entirely different matter.
Did you accept a long loan term?
It used to be standard for a car loan to be 36 to 60 months in length. This was a fairly manageable term and allowed the borrower to get ahead of the loan in a reasonable time.
These days 72 month and even 84 month loans are becoming more and more common. The problem with stretching your loan term out that far is that you never get ahead of the loan. You will have negative equity for the first three to four years of your loan and that means 2 things. Some day, you will be paying a new car monthly payment on a 4 year old vehicle and, if you need to trade it in, you will have to carry negative equity.
Never sign a loan term for longer than 60 months. The interest rate will be higher and you will never gain any loan equity. It simply traps you in a vehicle for longer than most like. If your vehicle payment is too high with a 60 month loan, choose a cheaper vehicle.
Did your income change?
Another way for a payment to get out of control is for your income to change. An auto loan payment that was affordable at one time could become a boat anchor if your income drops by $25000.
An income loss is not something that you can control, but an ounce of prevention can go a long way toward keeping it from wrecking your finances. Mainly, what you need to do is live a level under your means. If you can afford a $30000 car, drive a $25000 one. This will allow you to save money and adjust easily to a change of income.
Ways To Get Loan Payment Under Control
So, there are obviously many ways to get a car payment that is out of control. Now, how do you fix this problem. You have several options.
You can refinance your vehicle.
If you have good credit, simply refinancing the loan can take care of that car loan which is too expensive. It can do this in several ways.
Let’s say that your credit score has improved since you took out your car loan. You have been making your payments on time and keeping your debt under control and you have seen the benefits. Refinancing may be able to get you a lower interest rate, thus reducing your monthly loan payment.
Another way that refinancing can help is by stretching out your loan term. Yes, long loan terms are a problem, but in this case you need to reduce your expensive car payment now. If you originally had a 60 month loan term and have been paying on it for months, getting a new 60 month auto loan will stretch out your loan, reducing your payment. Even if you refinance for the same rate, your payment will drop because your new loan amount will be less than your original one.
You can trade it in on a cheaper car.
Perhaps you purchased a vehicle that was outside your means or you experienced a loss of income that has changed your finances. Trading in your car, even if you have some negative equity, might be a solution
If you decide to trade in your car for something less expensive, be sure to look at the deal with open eyes. Make sure that you would not be better off simply refinancing your current vehicle and try not to be in a hurry.
Also, take the time to negotiate your new car purchase price and your trade in value. Use a website like Carfax to get the value of your car and the car you are interested in before you head to the dealership.
You can voluntarily surrender it.
In the worst case scenario, you could voluntarily surrender your vehicle. If you are facing the possibility of losing your car or truck to repossession, this is an option to think about.
What voluntarily surrendering your vehicle would do is lower the collection account that will eventually wind up on your credit report. When a company repossesses a vehicle, they add the cost of repossession onto what you owe. Repossession fees plus the cost of vehicle storage can easily reach $1000 or more.
In addition, a vehicle that must be repossessed is more likely to be damaged before it goes to auction. That will lower the amount of money that a lender can recoup and increase the amount your lender charges you.