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What happens when you can’t afford car finance anymore?


Updated
04 Oct 2019

Man sitting on wall looking pensive

It’s something that all people with car finance dread – being unable to afford the monthly repayments. You’ve stretched your finances a little too thin for the past couple of months, and now you’re in a difficult situation. It can be overwhelming and you may be confused with regards to the options you have available. We hope that nobody even gets into this situation, but if you do, we have some answers for you. Here’s our guide to what can happen if you can’t repay your loan.

First of all, we’d like to stress that it’s incredibly important to be upfront and honest with your lender if you ever feel like you’ll be unable to afford your next car loan repayment. Waiting until you’ve missed a repayment puts you in a position of weakness and makes you look irresponsible and untrustworthy. Being forthcoming shows you can be trusted and are willing to work the situation out – this is a far stronger position to be in for any negotiations you may enter with your lender.

Modify the terms of your finance agreement

The best possible outcome would be if you can modify your finance agreement. You may be able to negotiate a longer repayment period, and therefore cheaper monthly repayments, or perhaps a lower interest rate. Some lenders will see this as preferable to missing a payment or you defaulting on the loan altogether, and if you are upfront about it, they’ll look even more favourably upon you. It’s been known for some lenders to temporarily allow lower payments or missed payments and to have the borrower make up for it at the end, however this is only if the financial difficulties are the result of a short-term setback and not a continual state of affairs.

Refinance the car

Another option you have is to refinance the car. Refinancing is when you seek an alternative finance option from a different lender, often with more favourable terms. In this case, if you may be able to refinance your car with a longer repayment schedule or a lower interest rate. This should make the loan more manageable and help you avoid missing on repayments. It’s important to note that, just like when you first secured your car loan, your credit score and financial history will be assessed. You’ll have a significantly better chance of successfully refinancing your car if you have a strong credit profile. Read our guide for tips on improving your credit score.

Allow someone else to assume your loan

It may be possible for you to find someone who will assume your loan (and car). If your loan is generally manageable and has a reasonable interest rate, then a buyer who is looking for a similar deal and vehicle may simply take over your loan. You’ll hand over the car and all responsibility for the repayments, and the new buyer will become the new owner and liable for the loan.

There are two factors which will affect your ability to have your loan assumed. Firstly, your lender will have to allow it – not all loans are assumable. Secondly, the buyer will have to meet the necessary credit score and monthly income criteria that you did when you first took out the loan. Consider these carefully before deciding to go down this route.

Guarantor loans

If your loan is secured by a guarantor and you become unable to afford the repayments, then your guarantor is legally obliged to make the payments for you. On one hand, this is a fairly straightforward solution to the problem. However, you don’t want to get into the habit of relying on guarantors to repay your loans for you. Not only can it be detrimental to your credit score and future borrowing prospects, but it’s also a sign that you are probably overextending your finances each month and should perhaps consider limiting your expenditure where possible for the foreseeable future. Read more about guarantor loans here.

Sell the car

This is an ideal option if you have equity in the car and are not particularly interested in keeping it. You have equity when the value of the car exceeds the amount you need to pay off. Negative equity is when the value of the car is less than the amount you need to pay off. If this is the case, then you will still need to pay the difference even after you’ve sold the car, which could eat into your savings.

Therefore, supposing you have equity, a way to avoid missing payments is to sell the car and use the money to pay off the remainder of the loan. Selling the car privately will fetch a higher price than trading in the car with a dealer, but there is often a lot more time and effort involved on your part. It’s important to consider the time factor carefully because you should aim to have your car sold before you miss a finance repayment, not after. Missing a payment will negatively affect your credit score and your ability to secure finance in the future.

Trade in the car

This is an alternative to selling the car yourself. Trading it in with a dealer is often a faster and simpler option because dealers are easier to find and generally make offers on the spot. You’ll usually receive a lower price (15-25%) than when selling privately, but you’ll quickly have access to the money to pay off your car loan or at least buy some time.

Return the car: repossession vs voluntary

It may come to a point where you have no option but to simply return the car. This can happen in two ways. One way is for it to be repossessed by your lender. This is where they physically come and take the vehicle from you. This will only happen if you’ve missed multiple payments and is a very unfavourable position to be in for two main reasons. One being that your credit score will suffer significantly, making it very difficult to secure any form of credit in the future. The other being that the lender may add the cost of repossessing the vehicle and selling it to the sum that you already owe. We advise that you avoid getting into this situation at all costs.

An alternative is to return your car to the lender voluntarily, known as “voluntary repossession”. It’s still not ideal, but you’ll be looked on more favourably by your lender if you take this route. You may be able to negotiate more manageable terms for repaying the difference you still owe (which is the difference between the total amount you owe and your lender can sell the car for).

File for bankruptcy

The final option to consider is filing for bankruptcy; it’s one that comes with significant ramifications and requires careful thought. Declaring yourself as bankrupt may clear your debt in some cases and may even allow you to keep your car, but it should only be considered as a last result. Declaring bankruptcy will be recorded on your credit profile and will significantly impact your credit score. You’ll likely find it very difficult to secure credit in the future. Always consult an expert before declaring bankruptcy.

In truth, none of these options are ideal and should be avoided. The best advice we could give would be to plan ahead and try to avoid getting into a situation where you’re unable to make your monthly repayments. We understand that this may be easier said than done, and unforeseen expenses may pop up. Whenever this happens, consult your lender and be honest with them about the situation – we’ve found that this is the best way to minimise the negative repercussions. For more information, visit our Help & Advice page.

     
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