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Can’t afford your car payments? Here’s what you need to know

Jodie Humphries avatar
Jodie Humphries
- 5 min read
Can’t afford your car payments? Here’s what you need to know

The average term of a car loan is up to five years. Although this may seem like a short period, you still can’t predict what might happen tomorrow and how your circumstances might change in that time. For instance, your finances may be impacted by major life events such as a wedding, divorce, or job loss. These events could make that monthly car repayment feel more like a burden than when you first took out the loan and something you can no longer afford. If you do come into some financial trouble, your first step should be to touch base with your lender and explain your situation to them. 

You may find it surprising, but most lenders are willing to work with you through your rough times. Lenders want to recoup their money and want to retain you as a customer for the future, so they will work to help keep you happy. Depending on your situation, your lender might agree to restructure your loan or reduce the monthly repayments so you can pay repayments without going into financial hardship.

What happens if a car loan is not paid?

Most car loans are secured against your car as security for the lender if you fail to repay the loan. This means your vehicle can be repossessed by your lender if you stop making the repayments. However, your lender is required to give you a 30-day notice to pay the overdue amount before repossessing your car. 

Some lenders also offer unsecured car loans where you don't have to use your car as security. If you've taken out an unsecured car loan, your vehicle cannot be seized by the lender without a court order. However, you do have the option of surrendering your car if you want to stop paying for the car loan. If you fail to repay an unsecured car loan, the lender will seek to recoup the money through debt collectors or similar avenues rather than just repossessing your car.

Besides potentially losing the keys to your car, not paying car finance also brings down your credit score and impacts your financial history. A lower credit score will make it difficult for you to get approved for a loan in the future, including a future car loan or a home loan.

What are my options if I cannot meet my monthly car repayments?

If you think you're likely to fall behind on your car loan repayments or have already missed a repayment, the first thing to do is contact your lender. You should do this as soon as possible to inform them of your situation and discuss your options with them.

If you're still willing to pay back the loan but don't currently have the money, you can request a hardship variation from your lender. Depending on your circumstances, the lender might offer you extra time to repay the loan, reduce your payments based on what you can afford, or give you a repayment holiday for a few months so you can get your finances back on track. Your lender should work with you to help you repay the loan whilst avoiding financial hardship.

Usually, it helps to make a budget with your essential living expenses before contacting your lender so you understand how much you can afford to repay and when. Once you have the necessary information, you'll feel more confident in negotiating a payment scheme that you can afford.

Refinancing your car loan is another option for reducing your monthly repayments. You can negotiate with your lender to reduce your interest rate or extend your term to reduce the size of your monthly repayments. Alternatively, or if that doesn’t work, you can switch to a different lender that offers a more competitive interest rate or loan terms. However, make sure to check the details of your current loan to see if you’ll be charged a fee to refinance; this is most often true with a fixed-rate car loan. Also, ensure you understand the terms of your refinanced loan. For instance, increasing the loan term may reduce your monthly repayments, but you may pay more interest in the long term.

You can use our car loan repayment calculator to determine how much you could save by moving to a different interest rate. It will also help you calculate the additional interest charges you might end up paying over the life of the loan by altering your loan term.

And remember, if you have found yourself in a difficult financial situation and need help managing your debts, you can access free financial counselling by getting in touch with the National Debt Helpline.

How to stop paying for a car loan altogether?

There may be a time when you’re so stretched financially that you feel certain you can no longer repay your car loan. In this case, you may choose to sell your car privately after informing the lender you plan to sell it. You're also required to inform the buyer that your car is under finance, especially if the car is held as security for the loan. Another option is to return the vehicle to the lender to sell it for you. In both cases, the money received from selling the car will be used to pay back the loan. You'll also need to pay the lender any outstanding balance if the car sells for less than what you owe. 

Once you sell the car, you may find that you’ve sold it for more than what you owe on the loan. In this case, you can use some of the funds from the sale to repay the lender, and the rest is yours for whatever you choose.

Now that you know what to do if you can no longer afford your car loan, it's worth reiterating the importance of getting an appropriately-sized car loan to try and avoid this situation in the first place. You might find this car loan guide handy in picking the right car loan for your needs.

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This article was reviewed by Personal Finance Editor Georgia Brown before it was published as part of RateCity's Fact Check process.