How to Get Auto Loan Debt Relief

If you’re behind on your auto loan payments, you face problems like damage to your credit and vehicle repossession. However, auto debt relief is possible through refinancing, lender hardship programs, and credit counseling, among other options. 

Auto Loan Refinancing

With auto loan refinancing, you take out a new car loan from a lender that offers refinance loans and use it to pay off the existing loan. If you have better credit than when you took out the original loan, you could qualify for lower rates, or you may extend your loan term to reduce your monthly payments and make them more manageable on your budget.

This option is best for borrowers who aren’t yet delinquent on their loans, but are struggling to afford their payments and are at risk of falling behind. Refinancing generally (but not always) requires good to excellent credit, so if you’ve missed payments on your loan and become delinquent, you’re less likely to qualify for a loan or get good rates. However, some lenders will allow you to refinance if you have a co-signer or joint applicant.

When you refinance to a longer term, you’ll get a lower monthly payment. But you’ll likely pay more overall due to interest charges accruing over a longer period, and you may end up upside down on your car loan.

How to Refinance Your Auto Loan

Follow these steps to refinance your auto loan debt:

1. Shop around: Rates, eligibility requirements, and loan terms vary by lender, so it’s wise to request quotes from several refinancing companies. Some lenders allow you to view your options by undergoing a soft credit check, which doesn’t affect your credit.
2. Compare offers: When comparing your options, pay close attention to the overall cost of the loan—but also dig into the APR, loan term, monthly payment, and fees.
3. Apply for a loan: Once you’ve found a loan that matches your budget, fill out the loan application and consent to a hard credit inquiry, which can cause your credit score to drop by a few points. Lenders usually make decisions relatively quickly, but sometimes it can take longer or more information may be requested. If approved for a loan, your new lender will work with your existing lender to pay off the loan. 

Assistance From Lenders

If you’re at risk of falling behind, contact your lender right away. 

“At the end of the day, creditors don’t really want your car—they want your payments—so many lenders may be able to work with you, especially if you’ve previously kept the loan in good standing,” said Amber Miller, partner experience manager with Greenpath Financial Wellness, a nonprofit credit counseling agency.

There may be hardship programs to make your loan more manageable. The sooner you contact your lender, the more options you’ll have. Ideally, you should do so before you’ve missed a payment. 

Depending on the lender, you may have the following options:

• Payment due date change: Some lenders will allow you to change your payment due date. By moving your payment date—say, to immediately after your paycheck arrives—you may be able to better budget your money and afford your payments. 
• Payment extension: With a payment extension, the lender gives you more time to make your payments. The added time is added to the end of the loan, so it will take longer to pay off the balance, and you’ll pay more in interest. 

How to Get Lender Assistance

To find out if your lender has financial hardship programs in place, follow these steps: 

1. Call your lender: As soon as you realize you’ll be short on cash, contact your lender’s customer service or financial hardship assistance departments. Explain your situation and ask what options are available.
2. Provide documentation: Depending on your situation, the lender may ask you to submit supporting documentation, such as a termination letter from your employer or bank statements. 
3. Get the agreement in writing: If your lender allows you to defer your payments or gives you an extension, get the agreement in writing. That way, you’ll have proof if there are any disputes later.

Auto Loan Settlement

If your vehicle has been repossessed and the lender thinks you’re unlikely to pay the amount owed, they may agree to settle the loan. That means the lender will accept a percentage of the amount owed and close out the loan.

Settling a car loan can prevent ongoing damage to your credit because the delinquent loan will be closed. However, the lender will report to the credit bureaus that the loan was settled, which can be a severe negative item on your credit reports. The settlement will remain on your credit reports for seven years, so it may be difficult to qualify for other forms of credit, including another car loan.

When you settle a loan for less than is owed, the difference between the balance and the settled amount is taxable as income, so you could owe a significant amount at tax time. You may receive a Form-1099-C, Cancellation of Debt, from the lender, which shows the amount of the canceled debt and the date it occurred.

How to Settle a Car Loan

Settling a car loan should be a last resort because of the lasting consequences to your credit. But if you think a settlement is the best option, follow these steps: 

1. Contact the lender: If the vehicle has been repossessed or is about to be repossessed, the lender will sell the car and apply the proceeds to the amount owed. However, you’re still responsible for the remainder. With a debt settlement, they may be willing to accept a smaller amount. 
2. Explain your circumstances: If you’re facing significant financial difficulties that make affording the payments unlikely, such as a job loss or medical bills, explain the issue and provide supporting documentation. If the lender sees that you genuinely cannot afford the payments, they’re more likely to agree to a settlement so they can recoup at least some of their money. 
3. Get everything in writing: Once you and your lender agree, get the settlement details in writing. You’ll need that information if there are any disputes about the loan’s status in the future.

Trading In/Selling the Vehicle

If you overextended yourself and purchased a more expensive vehicle than you can afford, one option for auto debt relief is to trade it in or sell it to get out of the loan. This strategy can be used for both secured and unsecured car loans. 

However, if you owe more than the car is worth—what’s referred to as being upside-down on a car loan—you’ll still owe money on the vehicle. If that’s the case, you’ll still have to pay the remaining balance, even though the car is no longer in your possession. 

How to Sell or Trade In Your Car

To sell or trade in your vehicle, follow these steps: 

1. Look up the current balance of your loan: Log in to your online account or contact your lender to find out what your payoff amount is—how much of the loan principal and interest and fees you owe to satisfy the loan in full. 
2. Get quotes for your car: You can use services like Kelley Blue Book, BlackBook, and Consumer Reports to find out how much your vehicle is worth. These sites can give you an idea of how much you can expect to get if you sell your car to a dealer or private party or trade it in for another car. 
3. Sell your car: You’ll likely get the most money for your car if you sell it privately. But if you’re looking to sell it as quickly as possible, selling it to a dealer can be a worthwhile alternative. You may be able to get a quote for your vehicle and get a check the same day. Once you get the check for your car, you can use it to pay off your existing debt.

Voluntary Surrender/Voluntary Repossession

If you’ve missed payments and are unable to get your finances back on track, the lender can repossess your vehicle at any time. They can tow your car from your home or even your workplace, leaving you scrambling to find transportation. And repossession can be expensive; you’re responsible for repossession, towing, and storage fees. 

Voluntary repossession can make the process less painful. By proactively contacting the lender to surrender your car, you can choose the date and time of the repossession and avoid surprises. The associated fees may be reduced.

However, if it is reported to the credit bureaus, a voluntary repossession or surrender will have the same impact on your credit as a forced repossession, and repossessions stay on your credit reports for seven years. Furthermore, if the lender sells the car and the proceeds don’t cover the loan balance, you’re still responsible for the remainder. If you don’t make those payments, the lender can send you to collections.

“While a voluntary surrender can still have a long-term impact on your credit, this last-resort option may be a way to avoid a repossession,” said Miller.

How to Surrender Your Vehicle

Follow these steps to surrender your vehicle:

1. Contact your lender: If you’re behind on your payments, contact your lender. If you cannot afford the payments—and your circumstances are unlikely to change—the lender will ask you to return the vehicle. 
2. Schedule a return date: If the lender agrees to a voluntary repossession, you can schedule a return date and time. Get any fees, like storage fees or other expenses, in writing.
3. Find out the sales price: After returning the vehicle, the lender will sell the car and put the proceeds toward the loan balance. Contact the lender to find out how much the car sold for and what the remaining balance is on the loan. 

Other Strategies for Auto Loan Debt Relief

There may be other ways to get some measure of auto debt relief: 

• Budgeting: If your car loan payments are stretching your budget thin, it may be time to give your finances another look. Sit down and review your expenses and income for the past few months, and look for any areas you can trim. For example, you may be able to decrease your car insurance premiums by switching insurers or free up cash by canceling unused subscriptions. 
• Debt cancellation or suspension coverage: Some dealerships, banks, and credit unions offer debt cancellation or suspension coverage. This is a type of credit insurance that applies if you become disabled or unemployed. It temporarily suspends your payments for the length of your financial hardship, but it’s usually an additional cost paid when you buy your car.
• Debt repayment apps: Debt repayment apps like Undebt.it can help you create a repayment plan using the debt avalanche or debt snowball method (or others) to pay off your balances more efficiently. 
• Credit counseling: A non-profit credit counselor can sit down with you and develop a budget, reviewing your debt and offering advice. 

“Credit counselors can offer budget counseling, and some may offer ongoing coaching as well,” said Todd Christensen, education manager with Debt Reduction Services. “However, nonprofit credit counseling agencies don’t work with secured debts like car loans or mortgages. Still, if you have unsecured debts like credit cards, store cards, medical debts, and collections that are draining your budget monthly, you might consider reaching out to see if their debt management program will free up some space in your finances so you can afford your car payment.”

The Bottom Line

If you’re struggling with a car loan you can’t afford, you know how stressful it can be. Worrying about missed payments or repossession can cause many sleepless nights. But auto debt relief is possible if you communicate your situation with your lender as soon as possible. You may be eligible for payment deferments, or you may be able to refinance your loan to reduce your payments. 

If the debt feels insurmountable and you don’t know where to start, contacting a nonprofit credit counseling agency can help you come up with a plan forward.