Financial setbacks can happen making it harder to meet your monthly loan requirements. While simply ignoring the problem until the vehicle is repossessed is an option, there are other ways you can get out of a bad credit auto loan without ruining your Fico score.
Equity in the Vehicle or Upside Down on the Auto Loan?
This simply means that the vehicle is worth more than the amount owned on the auto loan. If you owe more on than the vehicle is worth it is referred to as an “upside down auto loan’, and commonly occurs with older model cars.
If you have equity in the vehicle there are several ways you can legally get out of a bad credit auto loan without damaging your Fico score. If you are holding an upside down auto loan, it might make better financial sense to try and repay the lender.
How to Get Out of a Bad Credit Auto Loan
When you simply can’t afford to make the monthly payments on your auto loan, you do have options. Some of them will allow you to keep the vehicle, while others will require you to sign it over. The right one for you will depend on your unique financial situation.
Modify the existing auto loan.
If you are on good terms with your lender, and have a record of making the monthly payments on time, it might be possible to modify your auto loan. It is important to remember that this option will not work for everyone, especially if they already have a low credit score.
Some of the modifications your lender might offer can include,
- Temporary suspension of monthly loan payments. (typically no longer than 60 days, and they will be added onto the end of the loan)
- Lower monthly payments for a brief period of time.
- Offer to refinance at a lower interest rate. This could also result in a month of two of no loan payments while the bank is finishing the paperwork.
If you wait until the bank contacts you, your chances of being approved for any loan modifications are significantly decreased.
Trade-in the vehicle
Living without a dependable vehicle isn’t an option for some people, and if this applies to you trading it in might be the best choice for you. Not only do you get to choose a “new” vehicle, it often comes with lower interest rates.
You also want the asking price to be lower so it will be reflected in the monthly auto loan payments. Otherwise you’ll soon find that you can’t afford your new vehicle.
Let someone take over your auto loan
This typically only applies if you have an auto loan with a low interest rate, unless you have an extremely sympathetic friend or family member. If so, you might still get to keep the vehicle.
Typically, when you let someone assume responsibility for your auto loan you are also signing the vehicle over to them. If this seems like the best option for your financial situation, you will need approval from your lender. You cannot sign the vehicle title over to them, and expect the loan to follow.
The person assuming the auto loan will need to be approved by your lender, and the terms of their agreement might be different than yours. All parties will need to sign certain documents before the loan is officially out of your name. You will want to verify that your name has been replaced on the loan and vehicle title before leaving your lender’s office.
Sell your vehicle
Another option when you are having trouble making your monthly loan payments is to sell the vehicle yourself.
This option often takes time, and it can be a risky way to get out of a poor credit auto loan.
Turn the vehicle’s keys in
Known as “voluntary repossession”, sometimes this is the only option if you want to protect your credit score.
Some allow the lender to still hold your responsible for the remaining balance of the loan, even though the vehicle has been turned in.
You will want to speak with your lender before choosing this option to ensure that it is the best one for you.
Allow the vehicle to be repossessed
If you absolutely cannot go without a vehicle and there are no other options, you might just have to wait for it to be repossessed. This will have a detrimental effect on your credit that can last for up to seven years. During this time it will be difficult for you to secure another vehicle loan, along with any other type of credit.
Most Lenders are Willing to Help
The good news is that most lending institutions are willing to work with their customers if they find that they can’t make their monthly loan payments. This is due to the simple fact that they don’t want to take repossession of the vehicle once it has been sold. In the long run, it costs lenders and Buy Here Pay Here lots more money to resell the vehicle than it would to work with the existing loan holder.
Most will work with you so you can keep your vehicle, and get out of a bad credit auto loan.