How to change your car loan and avoid falling behind
Are you in financial distress and struggling to make the payments on your car? If your lender offers auto loan modifications, you could get some much-needed relief in one of a few forms. Also, you could potentially avoid damaging your credit score or repossessing your car.
What is a car loan modification?
As the name suggests, a car loan modification means changing the terms of your loan. The lender may agree to lower yours interest rate, defer your payments at short notice or change the due date of your payment to better suit your budget. You could also get an extended loan term that extends the balance of your loan to lower your payments. But extending the term also means the lender has more time to collect from you, so you pay more interest unless you get back on track and pay off the loan early.
However, the loan modification is not readily available to all borrowers. While lenders generally don’t like repossessing the vehicles of borrowers who have defaulted on their loans, you have to make your case. Part of this is convincing the lender that you can’t pay off your debt unless they agree to amend your loan.
How to get a car loan modified
You must contact your lender directly to discuss your situation and determine if you qualify for a loan modification. Keep in mind that your lender will usually review your payment history before making a decision. It’s worth pointing out that you were a good customer and managed your loan responsibly.
Follow these steps to have your car loan changed by your current lender:
- Call your lender now: Let your lender know that you risk falling behind on payments as they are no longer affordable. The representative can provide you with temporary options for relief, but asks that you speak to someone who can further assist you in finding a long-term solution.
- Make your request in writing: If a loan modification is available, you must usually submit your request in writing. You submit the application to the lender, along with proof of hardship and any other information or documents that the lender requests.
- Confirm receipt of your hardship application: After submitting all the documents, it is time to wait for a response from the lender. In the meantime, try to pay what you can and keep the team helping with the change informed.
How to know if you should change your car loan
Consider changing your car loan if your financial situation suddenly changed because of a job loss, layoff or vacation, medical emergency, or some other circumstance beyond your control. It could also be a smart financial move if you’ve recently experienced a pay cut.
You can also consider a loan modification if your car is worth far less than what you owe. That means you are turned upside down on the loan. Selling it to get a cheaper vehicle would prove quite challenging and could cost you a fortune.
Auto Loan Modification vs. Refinance
It’s easy to confuse auto loan modifications refinancing, but the two are not quite the same. Both of them can potentially get you a lower payment. But unlike car loan modification, refinancing your loan involves swapping your current loan for a new one with different terms.
You will likely need good or excellent credit to qualify, and you will need to go through the same application process as you did when taking out your current loan. Most lenders also require your car’s mileage to be no more than 100,000 miles, and you probably won’t qualify if your vehicle is more than 10 years old.
If your application for the new loan is approved, the lender repays your old loan and you resume payments with the new lender. However, with a car loan modification, you will work with your current lender throughout the process.
The final result
It can be stressful when you can’t afford your car payment and aren’t in a good position to refinance but can’t give up a car entirely. Consider contacting your lender to request a car loan modification. If that is not an option, there may be other programs to help you find relief until you get your finances back on track.