If you are like 85 percent of American workers you drive yourself to work and spend an average of 46 minutes on the round-trip commute every day, according to the Gallup poll. No one can blame you for wanting to make that commute in a nice ride. Dependable transportation is as much a need as it is a want, but sometimes your want gets in the way of your common sense, and you end up on the short end of a bad car loan. If you find yourself in that situation, you do have choices, but all of them involve some financial pain.
Bad Car Loan
There is no precise definition for a bad car loan, but if you have one you probably know it. If you owe more for your car than it is worth, you probably have a bad car loan. If your car is in the shop more than it is on the road, and you are still making payments on it, you probably have a bad car loan. Your original loan may have been fine, but then you got down-sized at work and took a job making half your former salary. Now you can't afford your monthly car payments. What started out as a good car loan is now a bad car loan -- one that keeps you financially tied to a car that you no longer want, need or can afford.
Examine the Problem
You need to figure out exactly what the problem is with your car loan before you can make an informed decision regarding what to do about it. If the condition of the car was misrepresented to you when you bought the car, you may have recourse through your state's auto lemon law. If you can't afford the payments, you may need to revisit your budget to see if there are other areas where you can cut back to make up the difference. If you are underwater on the car, but it is running fine and you can afford the payments, you might simply have to bite the bullet and keep making payments. But you can't address the problem until you know what it is.
Talk to Your Lender
Talk to your lender about your situation a soon as the problem becomes evident to see what options are available to you. Your lender may be willing to modify your loan by placing missed payments on the rear of the loan. The lender may offer to extend the loan for a longer time period, resulting in lower monthly payments. The longer you wait to contact your lender, the fewer options you will have, according to the Federal Trade Commission (FTC). The FTC notes that few lenders will offer to reduce your interest rate or cut your principal, and most auto loan modifications will result in an increase in the total amount of interest you pay on your loan. The FTC warns against paying a third-party loan modification specialty company in advance, as many of these programs are scams.
Sell Your Car vs. Repossession
You can sell your car and use the proceeds to pay off the loan, provided you sell the car for more than you owe on it. You'll need to do the math, but you may even be better off selling the car for less than you owe and taking out a smaller personal loan to make up the difference. Trading in your underwater car for a new car will only get you further in debt. Selling your car is usually a better option than allowing the car to be repossessed by the lender. Lenders typically sell repossessed vehicles at auction for considerably less than the market price. You will still be responsible for the difference between the auction price and the total amount of your loan, in addition to repossession fees and legal fees.
Bankruptcy may be an option if your total financial situation dictates it. There are two primary types of bankruptcy for individuals. Chapter 7 bankruptcy, sometimes referred to as liquidation bankruptcy, involves surrendering your assets, including the car, to the court trustee, who will liquidate them and use the proceeds to pay off your debts. You will no longer own the car, but you will also not be liable for the loan. In some cases, if you wish to keep the car, you may be able to reaffirm your loan at more favorable terms. Chapter 13 bankruptcy, sometimes referred to as the Wage Earner's Plan, allows you to maintain possession of your assets, including your car, while the court determines an appropriate repayment plan.
Unless you pay your car loan as agreed you run the risk of damaging your credit report. Your lender has the right to report late payments, loan modifications and repossession to credit-reporting agencies. Negative information can stay on your credit report for up to seven years and may make it more difficult to obtain a loan, or you may have to pay higher interest rates. Bankruptcies are public records that will remain on your credit report for up to 10 years. Even after a bankruptcy has fallen off of your credit report, you may be asked on credit or job applications if you have ever filed for bankruptcy. Failure to disclose this information may be grounds for denial of a loan or dismissal from your job.
- Federal Trade Commission: Ads for Auto Loan Modifications - You May Be Able to Drive a Better Deal with Your Lender
- Gallup: Workers' Average Commute Round-Trip Is 46 Minutes in a Typical Day
- Cars Direct: Getting Out Of A Bad Car Loan
- Edmunds: Depreciation Infographic: How Fast Does My New Car Lose Value?
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.