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How to Deal with a High Car Payment

February 5, 2019 | By Ana Elliot

It’s hard to imagine life without a personal vehicle in the United States. Here, most people have their own car. Families will generally have two or more cars parked in the driveway so all eligible drivers can get where they need to go. This is especially true outside of big cities where public transportation drops off to “barely an option.” And as such, most people have their own car. A lot of those car owners will also have car payments.

If you did your homework during the car buying process, your payment should match your budget, and all should be well. But there are cases in which that car payment thing really isn’t going as well as it could be. People lose their jobs, lose a family member, or perhaps their families unexpectedly grew, and then get roped into a car and payment they could never afford. If you are reading this article, it’s safe to say that it’s happened to you or someone you know. Whatever the reason, it happens to the best of us. The good news is, it doesn’t have to!

But what do you do when you can’t afford your car payment anymore? What do you do if your car payment is coming up and you find yourself without the capital to pay it? Well, we’ve got some advice that will hopefully get you in the right direction.

How to Deal with a High Car Payment

So, there are several avenues open to you, but they all depend on your situation. Firstly, you should try to assess what kind of solution you need: short-term or long-term. Once you’ve made that decision, you’ll have to assess your financial position, the state of your loan, and your credit.

Short Term Solution

If you’ve lost your job or had an unexpected financial burden, like a death in the family or a new baby, that should remedy itself in a few months, then a short-term solution could work for you. If you need a more long-term solution, but you’re already on the verge of missing a payment, then you also need to do the following:

Talk to the Lender

Talking to the lender should be your first recourse whether you just need to wait out your troubles or you are on the verge of missing a payment. Most lenders do not want to repossess your car (especially banks and credit unions) and can be very understanding of your situation if you explain it. If you got the loan with your bank, they will also help you by virtue of you being a loyal customer. Tell the lender what happened and why you are in your current circumstance.

There are a few things they might do for you as forbearance. They might allow you to pay reduced car payments for a while, put your payments on hold, or perhaps adjust your payment schedule so you can miss a few months that get added on to the end of your loan term. If all you need is that short-term solution, then this can help you until you get back on your feet. If you need something longer but are about to miss a payment, this can also give you the time to get a long-term solution in place.

Long Term Solutions for a High Car Payment

The long-term solutions you are going to have for a car payment that is too high are going to depend on a few things, but none more so than if you have positive or negative equity. Having equity on a car means you owe less than the car is worth. By that logic, negative equity means you owe more than the car is worth. If you have equity, you can sell your car or trade it in. If you have negative equity, you can try paying off the difference or get someone else to assume your loan. Another factor is your credit score. If you have good credit, you can look into refinancing your loan.

Refinancing (The Good Credit Option)

If you have good credit, you can refinance your loan to help bring your high car payment way down. If your credit has gone up since you first got your loan, you can probably get better loan terms if you refinance which means you could end up with a better interest rate and lower payments. If your credit isn’t great, you could still refinance and get a lower payment by extending your loan period.

While this might seem like a great short-term solution, you will end up paying significantly more in interest in the long run. If you are interested in refinancing and you got your original loan with the dealership, you probably won’t be able to go back to them. Dealerships don’t want to refinance your car loan and you will probably need to look at a bank, credit union, or online lender. If you went to one of those three to start, however, you might be able to work with your original lender to refinance the loan. If this sounds like an option for you, check out NerdWallet’s auto loan refinance calculator.

Selling or Trading In (The Equity Options)

While having equity also is helpful for refinancing, it will really help if you decide to get rid of your current car and its current high car payment. You can trade in your car and then get a cheaper car; the equity from your current loan should go towards paying off the new one. Conversely, you can do this by selling it yourself. What’s the difference? Well, if you trade in your car as part of getting a new one at a dealer, you aren’t going to get offered as much money as you would if you sold it yourself directly to a third-party buyer. Person to person sales generally generate more money, though they often take longer, so this does depend on how quickly you need to unload the loan. The reason this doesn’t work for negative equity is because if you owe more than the car is worth, you will still owe money if you sell it or trade it in. For instance, if you owe $17k on a car but it is only work $14k, if you trade it in or sell it for something around $14k, you are still going to owe $3k that you will need to get to your lender. If you do a trade in, that $3k will get rolled into the new loan and you’ll start that new loan upside down, which is not a good idea.

Negative Equity (A Lack of Options)

Negative equity is the hardest position to be in. You are going to find distinctly less options available to you in this category, but we’ve managed to scrounge up a few that could be useful. First, extending your loan terms through refinancing is an option. I mentioned this is not the best option in the “Refinance” section, but if you have negative equity, it’s one of your best choices. You’ll pay more in the long run but eventually, you’ll get back on top of it. If after you’ve spoke to a lender and gotten some form of forbearance, the other option is to save as much money as you can and try pay off the difference (if it isn’t too large). You can even see if you can get someone else to take over your loan. That is something you can work out with the lender though; if the other person doesn’t pay, you are once again back in the hot seat.

Make Your Plan and Execute Quick

Hopefully the biggest thing you’ve taken away from the above is that you need to deal with this issue right away. Make your plan, whatever that is, and don’t you dare miss that payment! Doing so will greatly affect your credit. Time is of the essence so go on and get crackin’!