Following up on my recent column about using restraint when purchasing a car, I often hear from people who have a car and can no longer afford the payments. Sometimes it is because the person lost his or her job, but more often than not, it is because the person didn’t think through his or her budget very well. I actually hear from people who want to trade their cars to lower their payments $50-$75 per month. Normally this cannot be done because they owe more on their car than its true value.
Often people contact me just before they know it is going to be repossessed, and that mean they are usually two payments behind and another one coming up. By that point, it is usually too late. If you get on this early, and not just hope it will go away, you have some options.
I am one who believes in personal responsibility. If you signed your name to a legal, binding contract, I think you need to do everything possible to live up to that obligation. Generally, when I run into someone who is in a bind with his or her car note, I recommend looking for a part-time job to keep them in their current car. I occasionally get laughed at for that one, but the truth is, anybody who needs to make a couple hundred dollars per month extra can. Seems like people having his or her weekend off is more important than anything.
Another thing you can do is contact your lender. If you communicate with them, often they will work with you by letting you defer a payment to give you some breathing room. It is important to understand, they do NOT want your car back, they will lose a lot of money. Communication early is key, at some point their first loss is their least loss. Talk to them when they call, returning their calls goes a long way in them helping you save your credit.
Again, if you catch it early, before your credit is harmed, there is a chance you can re-finance the balance and lower the payment. Once you are more than a month past due, this is almost impossible. Again, getting on it early pays off.
If you are close to equity position in your car, you can try to sell the car yourself, but often this is a long process and you may not have time for this. If your credit rating is not harmed, you can try to trade down to a cheaper car, and a cheaper payment. Not to sound like a broken record, but the earlier you do this, the better your chances.
Last, if you let your car be repossessed, it will take many years to be able to buy a nice car. You will be banished to “tote the note” lots, high interest rates, and large down payments. Although many of these lots are fine, many sell cars that won’t last long.
Don’t let anyone tell you that a voluntary repossession is better for your credit than if they come get the car. That is simply not true.
You should also know that just because you let your car go back, doesn’t mean the obligation is over. It is common for a lender to send your car to auction, sell it, then sue you for the deficit. They can get a legal judgment against you, and eventually you’ll have to pay it if you want another loan, or a mortgage.
It is best to use restraint before buying, but if you find yourself in this position, do anything you can to avoid losing your car.