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What should you do if you’re behind on car payments?

Are you behind on car payments ? You might start to have questions like “How many missed payments before car repossession?”, or “Can I get a repossessed car back?”. Before you make any decisions, let’s look at your options and see how you can get ahead.

Where should I start?

The first thing to do if you’re behind on car payments is to work out whether your money situation is temporary or permanent. The best way to do that is to create a 12-month budget that includes all of your income and expenses. Don’t forget to include things like your motor registration, council rates, birthday and Christmas presents, and other expenses that crop up throughout the year.

Tell your lender you’re behind on car payments

Once your budget is complete, sit back and review it. Does your cash flow improve in future months or does it look like you’ll keep falling further behind on your car payments? If your cash crisis is temporary, give your lender a call to explain the situation and ask them to help with more affordable payment terms while you get back on track.

Many people ask us “Can you defer a car payment?” and the answer is yes, however this is on a case-by-case basis and depends on your specific situation. You have to be honest and upfront with your lender. Make sure you have your budget in front of you so that you know exactly what sort of terms you can afford. It’s important that you don’t agree to a proposal you can’t stick to—it may only cause more problems in the future.

Depending on your situation and how far behind on car payments you are, you could propose:

  • Reduced payments that increase the length of your loan
  • A break from payments for a period of time while you get back on your feet
  • Refinancing the loan (usually only a viable option if you’ve already paid off a large chunk of the principal)

If you propose a break from payments (known as a payment moratorium), you’ll need to clarify if the outstanding payments will be: 1) due at the end of the moratorium period or 2) capitalised (added and spread) into the balance.

What if your cash flow woes aren’t temporary?

If your cash flow problems are long-term and you’re quite behind on car payments, it may be better to sell the car. Even then it’s important to understand the implications for your budget. The best scenario may be that you can afford to downgrade to a cheaper car and pay off the outstanding loan in full. But depending on how much you owe the lender and how much the car is worth, that scenario may not be possible.

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So, what are your options if selling the car would still leave you with money owing to the bank? You could:

  • Ask the lender to forgive the outstanding balance
  • Set up a payment plan to repay the outstanding balance
  • Roll the outstanding balance into a new loan for a cheaper car. (This is not usually a sound or viable option — it will probably only work if the new car is much cheaper and/or your loan balance is small. More importantly, it means taking out a new loan when your aim should be to eradicate your debt.)

The lender may also offer for you to surrender the car to them, in which case they would sell the car on your behalf. This is often a last resort if you’re behind on car payments.

Make sure you clarify if the lender will hold you responsible for any residual (ie. the outstanding balance of the loan after they have deducted the car’s sale value.) If you will be held responsible for the residual, it may be better for you to sell the car yourself—at least then you can be assured of getting market value for it.

Still feeling behind on car payments – or are you confident you can get ahead?

When you’re behind on car payments, the most important thing is to stay in contact with your lender, respond to their communications and be honest with them about your situation.

The worst thing you can do is to put your head in the sand. Likewise, trying to get out of debt using a credit card or taking out more loans is rarely successful and more likely to result in extra stress.

Looking for actionable steps to help with your car bills? Then get in touch with the team at MyBudget today.

The team at MyBudget can work with you to develop useful strategies that will help you avoid getting behind car payments and regain control of your finances. Call 1300 300 922 to book your free budget consultation or enquire online.

Ready to find out more?

Call 1300 300 922 or get started today

This article has been prepared for information purposes only, and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information in this article you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.