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Cars, whether they’re new or pre-owned are both a big responsibility and a big expense. There are many different costs to factor in, such as fuel, insurance, oil changes, repairs, tires, etc. Not only that, but you’ll need to consider other elements, like where you’re buying the car from, what your warranty will cover, if any, and of course how you’re planning to pay for the car in the first place. Depending on your current income and how expensive the car is, it can take years to finance completely, so it’s common for many would-be car owners to apply for a car loan.
A car loan, like any kind of loan, is a system that allows a buyer to pay off the total value of the car in monthly installments, making it more affordable. After all, very few people are going to be able to pay for a $25,000 car using a cheque.
However, when all the other car expenses are being considered, there are other factors that many people forget to take into account before applying for their loan, such as the cost of interest. They might be able to afford the loan payments initially, but something else might happen further down the road that makes paying more difficult. Loss of employment, decreased income and all manner of other financial emergencies might arise, making the car loan payments harder to afford. If this is the case, there are a couple of different ways of dealing with a car loan before it gets completely out of control.
Trying to decide whether leasing or buying a car is best for you? Read this.
What is an Upside-Down Car Loan?
Firstly, it’s good to understand one of the main reasons why a borrower will try to terminate their car loan. An “upside-down” car loan, sometimes referred to as “underwater,” means that the borrower owes more on their car loan than the car is worth, resulting in a position of negative equity. This can often happen with newer vehicles because their value will likely start dropping as soon as they’re driven off the dealership lot. As the years roll by, the car market fluctuates and the car’s value goes along with it.
This is a problematic occurrence with pricier, luxury models in particular. A buyer will jump at the chance of the seemingly low monthly finance payments, failing to consider what it will actually cost them in the long run.
Determine Your Car’s Current Market Value
If you’re thinking about trying to get out of your car loan contract because of the possibility of it becoming upside-down, it’s a good idea to get an estimate of the car’s current market value, before jumping to any conclusions.
You can likely find a number of websites that will calculate the value of your car, based on certain criteria like the make, model, color, etc. However, if you can also get a basic estimate by checking the mileage, going over the car’s various features and what shape it’s in, then look at used car classifieds and websites to see what cars similar to yours are currently going for. Once you’ve done this, calculate the approximate amount of your loan payments, making sure to factor in the interest costs, weighed against your income. If your loan payments add up to more than the car is worth, you might want to consider other options.
Check out this article about how to avoid car loan debt.
Selling the Car or Transferring the Loan
One option that you can choose, should the cost of the loan payments become more than you can handle, is to attempt to sell the car or transfer the loan to another buyer. If you manage to find a friend or family member that is able to take on the loan payments, it’s possible for you to get a new contract and sign it over to that person. However, this is not always an option with some lenders, banks and financial institutions included, because their protocols for borrowers can be strict. Since the lender is already taking a financial risk when letting someone borrow from them, they might not want to take on another, in case the new signer also fails to keep up with payments. In fact, if you don’t make sure that this new borrower signs all documents over to themselves, making them legally bound to the contract in your place, you will still be held responsible should they default on the loan.
This option should only be used as a last resort. If you can’t manage to transfer the loan to another buyer and payments are still becoming too hard for you to deal with on your own, you might need to contact your lender and inform them you’re choosing voluntarily repossession. Your property being seized as collateral is an unfortunate consequence that can come with defaulted payments on any secured loan. So, if you feel like you’re in danger of defaulting, it’s best to let your lender know right away and have the car repossessed willingly. If not, you could be subject to the actions of a collection agency and or have your vehicle repossessed.
Just be aware, repossession, even if it’s voluntary comes with consequences other than the loss of your car. Firstly, your credit score will drop significantly and a red mark will be added to your credit history, impacting your credit for years to come and stopping you from getting other loans in the future. Then, once the car is repossessed, the lender will likely attempt to sell it at auction. If they aren’t able to get the full balance of what remains on your loan out of it, you’ll have to pay it yourself or be subject to further actions of a collection agency.
For more information about the debt collection process in Canada, click here.
Refinancing or Negotiating a New Loan Payment Plan
This is likely going to the most reasonable and convenient path you can take if you feel that your car loan is costing you too much. The simplest solution, refinancing or renegotiating your payment plan with your lender, then paying off the balance of your car so that it will stress you no longer. Remember, you going into default on your payments will cause the lender a lot of issues and cost them money to deal with the process of repossession or any other legal actions. The easiest thing for both parties would be to figure out a solution where you can pay off your balance without the hassle that comes with the other alternatives.
Discuss refinancing options with your lender. If the monthly payments are too expensive, rest assured, you’ll be able to find a more reasonable rate of payment to suit your financial needs. The same goes for re-negotiating your payments in other ways. Depending on your chosen lender, you can also increase your payments or pay in several lump sums. While this might not seem appealing at first, if you have the money necessary to do so, it might actually be better for you, because you’ll end up paying less in interest, helping you pay off the loan and get out of debt faster.
Check out our helpful infographic on auto financing options.
Discuss With Your Lender Before Deciding
When you’re having financial difficulty and are not sure if you’ll be able to afford your car loan, the stress of it all can cause you to make rash decisions. However, the best thing you can do is to stay calm and get ahead of the situation by discussing it with your lender. Since your lender will likely not want to go through the motions of repossessing the car or having you transfer the loan to another borrower, they will be open to negotiating a solution to the problem. Overall, what they want more than anything is to be repaid in full, even if it takes fewer or more years than was originally planned.
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