How to Avoid Defaulting on Your Car Loan

Cars are essential for most American families. Many people rely on them to get to work, buy groceries, and all manner of daily necessities.

That's why it's a bad sign that so many car owners are struggling to make their car payments. In particular, the rate of delinquency for subprime borrowers (that is, borrowers with a credit score below 670) has doubled since 2021. According to Fitch Ratings, 6.43% of subprime borrowers are at least 60 days behind on their auto loan payments. Meanwhile, car repossession rates are the highest they've been since the Great Recession in 2008 and 2009.

Cars are expensive. Car loan interest rates are extremely high. Inflation is raising costs everywhere. So it makes sense that those with the smallest margin for error are having a hard time managing one of their biggest monthly expenses.

Unfortunately, most of us can't afford to not have a car. So if you've fallen behind on your car payments or are worried that you will soon, here are some tips on how to weather the storm and find a more affordable way forward.

Be proactive

The best time to deal with a delinquent loan or credit account is before you've missed a payment. That may seem nonsensical, but the truth is that being proactive and reaching out for help before you're in full crisis mode will usually give you more options.

Start by contacting your lender. Let them know about your hardship and why you've missed (or will soon miss) payments. Ask them about the possibility of:

• Waiving or reducing any late fees that you've incurred. With an extremely tight budget, sometimes those comparatively "small" costs can start a financial freefall.
• Moving back your due date to better align with your paycheck. If other expenses are jumping the line, reordering when things are due and how you prioritize your spending can be helpful.
• Being enrolled on a temporary hardship plan. The timeframe for these will vary depending on your lender, but the idea of a hardship is your monthly payments will be reduced for a short period of time, after which they'll return to normal. You'll likely also incur additional interest charges since it'll take longer to repay your loan, but the lower payments can be huge, especially if you're facing a temporary setback.
• A temporary payment deferral, with a few months worth of payments pushed back to the end of the loan. You'll still accrue interest charges while payments are paused, but this could buy you some time to address other aspects of your finances and make sure you don't miss any future payments.

Look for ways to lower the payment

If you can't afford your car payment this month, oftentimes you won't be able to afford it next month either. If that's the case, you'll always be struggling unless the payment changes permanently. 

• Refinance your car loan. You'll need good credit and a car that's still retained a good amount of value, but if refinancing is viable for you it may help you get a better interest rate and lower your monthly payment by stretching out the loan term. That may end up costing you more in the long run, but it can go a long way toward stabilizing your finances.
• Downsize to a cheaper car. You may love your car, but your car loan doesn't love you back. If your car payments are more than you can manage you may have to accept that the car you currently drive isn't one that you can afford. Consider trading it in for something with a smaller monthly payment.

Crucially, your options for lowering your payments are going to be better if you haven't actually missed any payments yet, so it's important to take action before you reach the crisis point.

Examine the rest of your budget

Is the car loan the problem, or is it a symptom of something bigger? It can be easy to focus on the one "problem" bill, but your car loan doesn't exist in a financial vacuum.

Do a thorough audit of your spending.

1. What are your essential, non-negotiable expenses? Think rent, medication, insurance premiums, food (the unfun "keeps you alive" kind of food), etc.
2. What are your necessities? Think phone, internet, car loan, car insurance, and gas for the car.
3. What are your non-necessities? Think Netflix, DoorDash, banjo lessons, and all those little conveniences and joys you'd rather not lose, but have to admit you don't need.

What can you cut from that third bucket that might help you better manage the car payment? Is there any way to save some money on the items in that second bucket?

You may need to strip things down to the bare essential for a while, especially in the wake of a major unplanned expense. But the temporary pain of reducing your spending is almost always preferable to the long-term pain of taking on debt, battering your credit score, or having your car repossessed.

Tackle your other debts

Most of us aren't dealing with just one kind of debt. If your car payment is at risk, it's likely battling your mortgage, student loans, medical debt, and credit card debt for attention.

When your options are limited with one type of debt, it's good idea to look at your other debts and see what can be done there.

Far and away the category with the most repayment flexibility is credit card debt. If you have credit card debt, you have options.

• Debt consolidation loans can help you turn multiple payments into one payment, usually with a reasonable interest rate. However, if you've already missed some auto loan payments your credit score may prevent you from qualifying for a loan.
• Debt management plans (DMP) are similar to debt consolidation loans in that they combine multiple debts into a single, however they aren't loans, so there's no credit score requirement. The DMPs at MMI have been proven to help clients get out of debt 7x faster than paying on their own.
• Debt resolution or debt settlement is a good option if you're already behind on all of your debts and there's no reasonable way to repay everything in full. With this option, your debts will be negotiated down and you'll ultimately only have to repay a percentage of what you owe.

And that's not even getting into balance transfers, bankruptcy, and some of the less common options available to you. The point is if you're not seeing a good solution for your unaffordable car loan, clearing away your credit card debt may give you the room in your budget needed to better handle that car payment.

At MMI, we offer personalized debt relief solutions that fit your needs. If you want a simple, affordable payment that saves you lots of money, complete our free online financial analysis. We'll review your debts, income, and expenses, and pair you up with the best repayment plan for your goals.