Auto Loan Debt Relief: How It Works and Who It's Right For

You bought your car fully intending to keep up with the loan payments, but unexpected expenses cropped up and now you find yourself with a monthly payment you can't afford. Fortunately, there are ways to address this situation other than giving up your vehicle.

You might be able to work with the lender to adjust your loan terms or take out a new loan. You could also try settling some of your unsecured debts—such as credit card debt or medical bills—to free up more cash for debt repayment.

The right strategy depends on your financial situation and what your lender is willing to offer you. Understanding the different methods is the first step toward auto loan debt relief.

What Is Auto Loan Debt Relief?

Auto loan debt relief is any strategy that helps you manage or reduce car loan payments that are difficult to sustain. This could include deferring payments, altering loan terms, or refinancing with a brand-new loan. 

You may have also heard about debt settlement, where you or a professional debt settlement company negotiate with your creditors to get them to accept less than what you owe. This works well with unsecured debts where the creditor doesn't have property it can seize to recoup what it's owed.

When you miss too many auto loan payments, there's a chance the creditor may repossess your car and sell it to get its money back. It's often possible to avoid this. The key is being proactive so that you don't have to deal with a budget-straining bill for your entire loan term, which could be five years or more.

You want a solution that offers your creditor the most money and the least amount of inconvenience. Sometimes, there's some wiggle room there. Lenders might be willing to wait a a couple of weeks for their money rather than going through the hassle of repossession.

Auto Loan Debt Relief Options

Here are the main options you have if you're struggling to keep up with your auto loan payments.

Work with your lender

A good first step is to contact your lender when you realize you can't make your auto loan payment, ideally before the payment due date. This will give you a chance to explain your situation and work out a solution that you and the creditor can live with.

Some creditors will offer options like:

• Payment deferment. This enables you to temporarily stop making payments or make interest-only payments without any negative effect on your credit score. At the end of the pause, you’ll have to get caught up on all missed payments.

• Due date adjustments. The creditor may be willing to change your payment due date to better align with when you receive your paychecks.

• Reduced payments. You may be able to negotiate a lower monthly payment for a certain period of time.

Creditors aren't obligated to offer any of these benefits, but many do because repossessing a vehicle is costly and time-consuming. 

Check with your creditor to find out if it offers any hardship programs. The website might have this information, or you may have to call directly to explain your situation. 

Be sure you understand exactly what you're agreeing to before you enroll in a hardship program. For example, if you opt for deferred payments but your balance continues to accrue interest, you'll pay more money overall. Only commit to a plan if you're comfortable with these tradeoffs.

Refinance your auto loan

Refinancing your auto loan involves getting a new loan and using it to repay your existing loan. Ideally, your new loan has a lower interest rate or monthly payment. This strategy could work well if you have good to excellent credit and haven't yet missed any payments. It can also be a good fit if interest rates have dropped since you first took out your loan or if you accepted a higher interest rate through dealer financing. Auto dealers typically have higher rates than other lenders. 

Refinancing could lower your monthly payments, making them easier to fit into your budget. If you extend the loan term, you could pay more over its lifetime. The tradeoff could be worthwhile if it helps reduce the strain on your budget. Just make sure the loan term is shorter than the expected lifespan of the car. You don't want to owe money on a car you can no longer drive.

If you think auto loan refinancing makes sense for you, compare rates from three to four lenders before you choose one. Be sure to understand how much you'll pay, both per month and over the lifetime of the loan. Some lenders have prequalification tools that can give you an idea of what your monthly payment would be without impacting your credit score. This is a good place to begin when narrowing down your options.

Sell or trade your vehicle

Selling or trading your vehicle could be an option if you think you could afford a less expensive car or you could get by without a vehicle for a while. Do your research before you get started.

Look up your car's value from reputable sources, like Kelley Blue Book. Dealer ad listings may not accurately reflect the vehicle's value.

If you sell your car for less than you owe, you’ll be upside down on the loan. In other words, you’ll have to come up with the difference to pay off the loan. The lender won’t transfer the title to the new owner until your loan is fully paid off.

Still, this could be a proactive way to address the situation if you don't believe you can keep up with your existing loan payments. By selling the car on your own terms, you avoid the negative credit score impact of a repossession.

Voluntary surrender

Voluntary surrender is where you give your vehicle to the lender who then resells it. If the amount of the sale covers the remaining loan balance plus any administrative fees the lender charges, you're off the hook. If it doesn't, you'll still owe the remaining amount. 

Voluntary surrender is considered a repossession and will appear on your credit report as a default, typically remaining for up to seven years. But it may not be as significant as an involuntary repossession because future lenders viewing your report will know that you did it proactively in an attempt to resolve the situation. In some situations, you might save on fees compared to a forced repossession.

Settle your auto loan

Settling your auto loan could be tricky while you own the vehicle because the lender can always repossess the car and sell it to get its money back. If you come across any companies promising to settle your auto loan for a fee while advising you to stop making payments, that’s a red flag. It's likely to lead to the lender repossessing the car.

Settling your auto loan could become an option if you sell or voluntarily surrender the car and still owe a balance. At that point, the debt is unsecured because you no longer own the vehicle. The remaining amount is called a deficiency balance. Since the car is already sold, your deficiency balance is an unsecured debt and could be a candidate for debt settlement.

Debt settlement could lower your credit score. It will remain on your credit score for seven years, but its impact will diminish with time.

When to Consider Auto Loan Debt Relief

The best time to seek auto loan debt relief is when you realize your payments consistently exceed your budget or make it difficult to meet other necessary expenses. Some warning signs include:

• Relying on credit cards or short-term loans to cover your car payments

• Choosing between car payments and other essential expenses, like groceries or rent

• Receiving late payment notices from the lender

The sooner you act, the more options you'll have. Lenders may often be more flexible with borrowers who reach out before they miss a payment. Also, if your credit score is still high, you could have a better chance of finding an affordable auto loan refinancing rate. 

The right strategy for you depends on the cause of the financial hardship. If it's a short-term issue, like an unexpected bill that rattled your budget for a short time, asking for a payment deferment might be all you need.

If you expect the financial hardship will be ongoing—for example, you lost your job and don't know when you'll find a new one—you may need to consider a longer-term strategy, like selling the vehicle or voluntarily surrendering it.

How Unsecured Debt Relief Can Help Your Auto Loan Situation

People struggling to keep up with their auto loan payments often need help with other expenses in their lives, like credit card debt, medical bills, or personal loans. These types of debt are great candidates for debt settlement.

Debt relief programs like Freedom Debt Relief negotiate with your creditors to get them to accept less than you owe. You may want to stop making payments to your creditor and instead put money into an account that you control. When you've saved enough, Freedom Debt Relief will make an offer to your creditor. If it accepts, you're off the hook for the remainder of the debt.

Most consumers resolve their first debt within a few months of the program and have all enrolled debts settled within two to four years. The exact timeline depends on your creditors and how much you owe.

Using debt settlement for these unsecured debts could give you more room in your budget  for your auto loan payments. This is an alternative to the options above if you want to hold onto the car but can’t reach a deal to modify your loan terms or find an affordable refinancing rate.

If you think Freedom Debt Relief's program could be a good fit for you, you can call for a free consultation. A representative will listen to your situation without judgment and walk you through how it works. Then, you can compare strategies to decide which one is right for you.