What to Do if You Can’t Afford Your Car Payment

When you need a vehicle to get around, you might feel pressure to spring for more than you can truly afford. Whether your financial situation has changed or you felt pressure to overspend at the dealership, being stuck with a car payment that you cannot afford is an uncomfortable situation.

If you feel trapped with an oversized auto payment, the good news is that you have options. Let’s explore what you should do if you can’t afford your car payment.

Average Car Payment

Based on Experian data, around 8% of new car purchases in 2022 were financed. With that, the overwhelming majority of drivers of new vehicles drove off the lot with a car payment.

Not only are most drivers financing their new rides, but many are also dealing with a relatively large monthly payment. As of the first quarter of 2023, the average monthly car payment for a new car was $725. Additionally, the average loan term was 68.64 months.

Approximately 40% of drivers who opted to purchase a used vehicle financed their ride. Of drivers who financed used rides in the first quarter of 2023, the average car payment was $516. The average loan term was 67.42 months.

Average car payments have been on the rise in recent years. And it’s worth noting that a driver’s car payment isn’t the only expense related to driving a vehicle. Other expenses like insurance, maintenance, and fuel can add up quickly. With that, the overall cost of owning a vehicle easily takes a bite out of anyone’s income.

What to Do if You Can’t Afford Your Car Payment

Paying over $700 per month for a new vehicle for over five years is the norm, based on Experian data. Even when opting for a more affordable used vehicle, many drivers are paying over $500 a month for over five years.

With numbers like that, it’s not surprising that many run into trouble paying off their vehicle. When you bought your vehicle, you likely didn’t anticipate the heavy burden of the auto loan payment. Maybe your financial circumstances have changed, or maybe the reality of your budget makes your auto loan payment unaffordable. Whatever the reason behind the unaffordability is, now is the time to look forward.

If you can’t afford your car payment, you’ll need to act quickly. Below are some strategies you can pursue to eliminate this burden as soon as possible.

Communicate With the Lender

When you think you are in danger of missing an auto loan payment, reach out to your lender as soon as possible. The good news is that many lenders are willing to work out a temporary reprieve. After all, repossessing a vehicle is a time-consuming process.

Get in touch with the lender before you miss a monthly payment. Do your best to explain the financial pickle you find yourself in. Depending on the lender, the representative may be able to change your due date to later in the month or defer your payments for a month or two.

While neither option is a permanent solution to your financial woes, both can offer you a chance to sort out your immediate financial issues. For example, you might be dealing with a changed payday schedule and a new payment due date is exactly what you need.

Renegotiate Your Loan Terms

If you realize that your current auto loan payment amount is simply too high for your situation, consider approaching the lender to renegotiate the loan terms. The lender might be willing to modify the original loan by extending the loan term. A longer loan term can help you tap into a lower monthly payment obligation. Although you’ll likely pay more in interest over the life of the loan, you’ll have an opportunity to keep the car without falling behind on your loan payments.

Don’t be afraid to ask your lender about this option. Remember that the worst they can do is say no.

Refinance Your Auto Loan

If the original lender isn’t open to renegotiating your loan terms, refinancing your auto loan with a new lender might be an option. In general, refinancing your auto loan is a good choice for borrowers with good credit who owe less than the car is worth.

Depending on the situation, you might be able to lock in a lower interest rate or longer loan term. In either situation, you could walk away with a lower monthly payment. While there might be some fees involved with this option, it offers a long-term opportunity for payment relief.

Think About Selling the Car

Most drivers don’t want to think about selling their vehicles. But getting rid of the car for good might be exactly what you need. Take a look at how much you could expect to get for the vehicle. In general, you’ll earn more from a private sale than trading it in through a dealership.

If you owe less than the vehicle is worth, choosing to sell the vehicle can help you walk away from the loan altogether. If you owe more than the vehicle is worth, you’ll still be dealing with an auto loan balance after completing the sale.

Consider Trading in the Car for a Cheaper Ride

While selling your vehicle to a private party usually comes with the highest price tag, trading the vehicle in at a dealership is often more convenient. When you trade in your vehicle at the dealership, you may be able to drive off the lot with a much more affordable vehicle and leave this too-high auto loan payment behind for good.

If you choose to replace your vehicle with an older model or smaller ride, you might miss your old wheels. But your wallet will thank you. Not only will you eliminate this unaffordable monthly payment, but you’ll also be able to save money on other aspects of vehicle ownership. For example, choosing an older ride generally means you’ll pay less for car insurance. And choosing a smaller vehicle usually means you’ll pay less for gas.

Ask for a Helping Hand

If you aren’t willing to downgrade your vehicle, or you are too far upside down on your auto loan to make a trade-in work, then consider asking for a helping hand. Although it might be uncomfortable, asking a family member or friend for a temporary loan could be what you need to get back on your feet.

Of course, mixing family and money isn’t always easy. If you pursue this option, consider setting up a formal agreement in writing with repayment terms clearly outlined.

Increase Your Income

In some cases, boosting your income temporarily can provide an influx of funds necessary to keep up with your auto loan payments. When it comes to building another stream of income, a little bit of creativity can go a long way.

Here are some ideas to get you started:

•     Ask for a raise: The easiest way to increase your income is to get paid more for the work you already do. When you approach your boss for a raise, come prepared with reasons that have nothing to do with your auto loan payment. Instead, support your ask with examples of the extra projects you’ve taken on or the latest data about the industry ranges for your position.
•     Get a part-time job: Picking up a second job is one of the tried-and-true ways to increase your income.
•     Build a side hustle: A side hustle is a non-traditional way of earning money outside of your day job. A few possible side hustles include dog walking, selling items online, and freelance writing.
•     Sell your clutter: So many of us have extra stuff lying around the house. If you have expensive items collecting dust, consider selling them off to cover your car payment.

Surrender the Vehicle

As a last resort, you could choose to voluntarily surrender the vehicle. If you know that you’ve missed several payments, the next step for the lender is to repossess your vehicle. Instead of having the repo man tow away your vehicle, you have the option to voluntarily surrender the vehicle to your lender.

When you give the car back to the lender, you’ll likely see a negative impact on your credit report. However, choosing to turn over the vehicle of your own accord will mitigate some of the negative impacts.

After the lender has possession of the vehicle, they’ll likely sell the car at auction. The lender will subtract this amount and any associated fees from the loan balance. But you’ll be responsible for paying off any remaining loan amount.

How Getting Out of a Car Loan Will Impact Your Credit Score

When you decide to get out of a car loan early, you’ll be taking a different path out of the original deal. The way you deal with your car loan makes all the difference to your credit score.

Big Impacts

Some actions will have a big impact on your credit score. If possible, avoid the following outcomes:

•     Missing multiple payments, resulting in repossession: Essentially, this is the worst-case scenario for your credit score. Not only will the series of missed payments have a negative impact on your credit score, but the repossession will also leave a derogatory mark.
•     Voluntary surrender: If you choose to voluntarily surrender your vehicle to the lender, it means you weren’t able to uphold your end of the deal. With that, you’ll see a negative impact on your credit score.

Smaller Impacts

While your credit score may still be impacted, the following pathways should have less of an impact on your credit score.

•     Sell the vehicle: If you sell the vehicle, and pay off the remaining loan balance, then you could walk away with minimal impacts to your credit score. The key to this equation is being able to sell the vehicle for as much as your remaining loan amount or covering the difference with savings so you aren’t left with an unpaid balance.
•     Transfer the auto loan: If you find someone willing to take over the vehicle and the payments, the new borrower will likely need to pass the lender’s inspection. Once everything checks out, this eliminates the burden of your auto loan.
•     Refinance the loan: If you refinance the auto loan, you might be able to lock in a lower monthly payment. In general, this can help you avoid missing a payment or having a negative impact on your credit score.

Frequently Asked Questions

You have questions about what to do if you can’t afford your car payment. We have answers.

Can a Car Payment Be Deferred?

Yes. It’s possible to have your car payment deferred. But every lender has different rules about whether or not it will grant a deferment. If you want to have your car payment deferred, then reach out to your lender as soon as possible.

How Many Payments Can You Miss on a Car Loan?

Ideally, you won’t miss any car payments. Any missed payments will have a negative impact on your credit score. Missing a single payment might be enough to trigger the repossession process. But most lenders usually wait until you miss three or more payments before repossessing the vehicle.

What Happens if I Pay an Extra $100 a Month on My Car Loan?

If you choose to pay an extra $100 per month toward your car loan, you will pay down the principal faster, which means you’ll pay off your auto loan ahead of schedule. If you’re considering doing this, be aware that you might have to pay a prepayment penalty for paying off your loan early.

The Bottom Line

If you are stuck with an auto loan payment that you can’t afford, you’ll need to make some tough decisions. In some cases, selling off the vehicle is the right move. But in some cases, renegotiating the loan terms with the lender can give your budget the breathing room it needs. Do whatever it takes to get a handle on your unaffordable auto loan payment. The sooner you tackle this issue, the better off your finances will be.