Settling a Car Loan: Is It Possible?

A new car is more expensive than ever, and even used models could throw your budget for a loop. It's smart to look at your options if you're currently struggling with a car loan you can't afford to repay.

Debt settlement is a common form of debt relief that many people use to deal with unmanageable debts like credit cards or personal loans. So it makes sense you'd wonder if it will work for your car loan, too.

Unfortunately, settling a car loan is typically much harder than settling a credit card or personal loan. We'll go over the settlement process, how it's different for car loans, and what alternatives you might have to deal with an unaffordable auto loan instead.

How Debt Settlement Works

The point of debt settlement is to negotiate with your creditors to accept less than you owe to get rid of your debt. You'll pay an agreed-upon amount, and the creditor will forgive the rest of your debt. You may do these negotiations on your own, or you may hire a professional debt settlement company to negotiate for you.

Settlement works when your creditor believes it to be the most profitable option. In other words, the creditor needs to believe you can't repay your full balance and that it will get more money with less hassle from settling than from suing you. 

It often helps if you can show financial hardship, or a situation that makes it impossible for you to repay the full amount you owe. This could be something like job loss, divorce, medical bills, or emergency home repairs. 

Creditors are also more likely to settle if you're already behind on your bills. If you've been making your minimum payments, the lender might not believe that you aren't able to just keep doing so. Being 90 days or more past-due on payments could signal to the lender that you're really struggling.

Why Auto Lenders Rarely Settle

Debt settlement can be an effective way to deal with credit cards, personal loans, and other unsecured debts that aren't backed by collateral or something of value. That's because the lender ultimately has two options if you stop repaying unsecured debt and regular collection efforts fail: settle or sue.

Auto lenders aren't so limited. Typical auto loans are secured loans backed by the vehicle itself. This means the lender could repossess your car if you stop making payments. The car can then be sold to recoup the lender's losses.

Since selling off your collateral is always an option, auto lenders aren't likely to settle a car loan for less than what you owe. The one exception may be if the vehicle is worth less than you owe on the loan. In this case, the lender may find that settling is more profitable than repossession.

Even if the lender would be willing to settle, you likely have a very small window to act. Many lenders will start repossession proceedings after just 60 days of missed payments. This gives you very little time to save up for settlement and to negotiate with the lender.

Alternatives to Settling a Car Loan

If you're concerned about making your car payments, you might have options other than settlement. Let's look at a few ways you could potentially get out of an unaffordable car loan.

Negotiate your current loan terms

In times of financial hardship, your lender might be willing to work with you. Contact your lender before you fall behind and ask about hardship programs. Some lenders offer hardship programs that could offer temporary relief, such as:

• Forbearance or deferred payment. This is a short-term pause in payments while you get through your situation. You'll need to make up the payments later. Interest may keep growing while payments are paused.

• Loan modification. The lender may let you adjust your loan terms, such as extending your loan. This could help lower your monthly payments in some cases.

• Reduced minimum payment. The lender could reduce your monthly payment for a few months to help you better weather a financial hardship. You'd still need to repay the full amount eventually.

Keep in mind that hardship programs are always temporary. They won't be long-term solutions.

Refinance your loan

A lower interest rate or longer loan term could help make your loan more affordable. If your credit is good, consider refinancing your auto loan. This involves getting a new loan to pay off your existing loan.

Ideally, your new loan will have a lower interest rate, which could reduce your monthly payments. You could also refinance to a longer loan term, which could cut down your monthly payment but would make the loan more expensive overall.

Sell the car

You may have purchased your car during better times, when the loan was more affordable. If your financial situation has changed, you may want to sell the car and purchase something less expensive. 

While selling your car isn't ideal, it's probably far better than losing the car to repossession because you couldn't make your car payment. This way, you still have some control over the outcome.

Most cars won't sell for a profit; try to get at least what you owe on your auto loan if you can. Trading in your car will likely be less profitable than selling it privately, but your experience may vary.

Voluntarily surrender your car

A voluntary surrender, or voluntary repossession, is when you give up your car before the lender repossesses it. This could not only cut down on stress—you decide when to turn in the car, versus someone showing up to take the car on the lender's schedule—but it may also help you avoid repossession-related fees. Plus, it could look better on your credit reports than a repossession.

Get rid of other debt to free up cash

While settlement isn't usually an option for auto loans, it could be an option for other debts. If you're also struggling with unsecured debts, like credit cards, then you might be able to settle those debts instead of your car loan.

Getting rid of high-interest credit card debt could free up a lot of room in your budget. This could help you stay on top of your car loan and avoid repossession.

Curious if debt settlement might help with your situation? Get a free evaluation from Freedom Debt Relief with no obligation.