Can’t Make Your Car Payment? Here’s How to Avoid Defaulting on a Car Loan

Take a deep breath: avoiding a default on your car loan isn’t as hard as you think it is.

By now, hearing that the price of the average new car is north of $50,000 shouldn’t shock anyone. In tandem with higher insurance rates and pricey registration costs, there’s another even more painful wrinkle: more and more drivers are struggling to make their car payments and are at risk of defaulting on a car loan.

If this feels familiar, we get it: both new and used car prices have seen record highs in recent years, and higher interest rates aren’t helping. For many people, the pandemic reshaped how we drive; many of us still don’t want to use public transit, moved further from work, or started a family and now a car is a necessity. 

If your car payment has you feeling as if you’re gasping for air, take a breath and read on. There are solutions to keep you in your car without jeopardizing everything else. 

This story is 100% human-researched and written based on actual first-person knowledge, extensive experience, and expertise on the subject of cars and trucks.

Why Should We Be Scared of Defaulting On a Loan?

Our cars can be our lifeline—to work, school, and easy or inexpensive travel. Recognizing this, most people prioritize car payments and maintenance, but even one missed or late payment can trigger the repossession process. And if you don’t know, that means the bank comes for what’s rightfully theirs. Sometimes even going as far as taking it from your driveway on a tow truck.

And that can start a domino effect of other things: loss of transportation to work, lost income, severe damage to your credit score, and more. The best defense against defaulting on a car loan is to not let things get to that state. But if they do, here’s what you need to know. 

First, A Lesson on Your Credit Score and How to Fix It

Your credit score tells a dealership’s finance department a lot. If it’s a good score, it tells them that you’re responsible, making your payments on time, and managing debt responsibly. If it’s an average or low score, it tells them that signing loan papers with you is risky. It doesn’t tell them anything about your income—just your ability to manage debt.

While we should always aim to keep our credit in top shape, life happens. If finances get tight—whether your company is cutting hours, sales are down, or unexpected expenses force you to rely more on credit cards—taking proactive steps with your credit can protect you from taking a double hit if you need loan relief later.

To keep your score as strong as possible, here are a few things to start doing:

• Clean up your credit report: Routinely check your credit reports. Most banks offer their own credit score dashboard, where you can look at your current score and what’s affecting it. You can even check sites like Equifax, Experian, or TransUnion. If a late payment or account has an incorrect report on it, you can dispute it. If there’s an accurate late payment on an account that has good standing, you can write a letter asking the creditor to remove it. Even if removing it boosts the score by a single point, it’s worth it.
• Pay down revolving debt: Paying down high-interest credit card balances brings down your credit use ratio (which accounts for 30% of your score), which will give your score a quick boost.

Be Sure to Notify Your Lender; They May Be Able to Help You

If you know without a doubt that you’re about to miss a payment, reach out to your lender ASAP. Many lenders have hardship programs, like payment deferments or loan extensions, that can temporarily pause or lower your payments before your credit takes a punch to the gut.

Several manufacturers offer similar programs through their in-house finance departments. For example, Ford Credit, Toyota Financial Services, GM Financial, Hyundai/Kia Finance, and Subaru’s in-house financing (through Chase) offer these kinds of services. If you’re going to call, make sure you do it quickly. Most lenders will shift your account to collections or repossession if they don’t hear anything from you between 60 and 90 days after the payment’s missed.

Other popular banks list hardship programs, too, like Chase Auto, Capital One Auto Finance, and Ally Financial do, too. Most will waive any late fees that come with loan extensions, too, but you have to be keen about asking for one.

If You Can, Pay Off Your Car’s Loan

Paying your car off early can have some nice benefits: no more car payments, no chance of repossession and ultimately, you’ll pay less interest, so your car will cost you less. Clearing the loan takes away a significant monthly obligation, leaving you with a fully paid-off asset and one less bill to worry about if money gets tight.

But you can’t just multiply your monthly payments by the number of months you have left on your loan. Auto loans accrue interest daily, so you need to call and ask for the official payoff quote from your lender. That number reflects your remaining principal, plus any daily interest accrued up to a specific date.

While you have your lender on the phone, you can also ask about any prepayment penalties or specific instructions for processing an early payoff. It’s not as common anymore, but some lenders will punish you for paying off a car too early. It’s always worth asking so every penny goes directly to closing out the account.

Consolidating Your Debt is an Option, Too—But Proceed With Caution

If paying off your car early isn’t possible with the cash you have on hand, consolidating your debt can lighten the load. Debt consolidation loans involve taking out a single new loan to pay off multiple existing balances so everything is one lump sum. This can mean combining your car loan, high-interest credit cards, student loans, or any personal loans, making for one streamlined monthly payment.

But you’ll have to tread with care and be sure to ask the right questions. Auto loans are secured by your car, which means they usually carry lower interest rates than unsecured (based on your credit score and income) personal loans. Combining a low-rate auto loan with credit cards into an unsecured loan can inadvertently raise the interest rate on your car.

Like a House, You Can Refinance Your Car

If you bought your car when interest rates were high, or if your credit score was lower back then, you might be paying more for your auto loan than you have to be. Refinancing replaces your current loan with a new one, complete with new terms and interest rates. If done right, a new loan can come with a lower interest rate, a lower monthly payment, or—ideally—both.

Unlike refinancing your home, refinancing a car is quicker, more straightforward, and unless you’re refinancing a six-figure luxury car, a lot less expensive. But be sure to make sure your state doesn’t charge title transfer fees for lenders on the title, and be mindful about extending your loan term. Payments on a new 48-month loan will be less than your old 24-month loan, but you could wind up paying a lot more in interest over time.

Double Down on Payments and Pay Off Your Loan Faster

If you have extra cash on hand, making larger or more frequent payments is a great way to build equity in your car, lower your total interest costs, and shorten the duration of your loan. But it’s important to understand how extra payments work: paying extra today doesn’t excuse you from next month’s payment.

Extra payments go directly toward reducing your principal balance, which is the actual amount you borrowed to buy the car. Some extra money stops interest from accruing on that portion of the balance moving forward. But unless you pay off the entire remaining loan in full, your standard monthly payment will still be due on its regular schedule each month.

And, you have to make sure your lender applies the extra funds correctly. When making an extra payment online or by mail, select or write “principal only” if you can, or some servicers will process the extra money as an advance payment, rather than reducing the principal.

Sell Your Car and Buy a Less Expensive One

With used cars still in high demand, many car dealers are happy to trade your newer car for one that is older and often will even pay off your loan and roll the payoff amount into the price of the car they’re selling you. 

There are caveats and gotchas to look out for—the interest rate on a loan, the number of months of a new loan, the fair value of the car you’re selling, the fair value of the car you’re buying. But car dealers are all about moving cars and writing loans, so they’re usually happy to do this, especially at the start or the end of the month when things are quiet. Just make sure that this sort of trade works in your favor. 

If you buy a used car, be sure to do your due diligence: know the fair market value of the car you’re selling, the fair market value of the car you’re buying, read the CarFax thoroughly and have it inspected independently to ensure it’s in good shape. And shop your loan around; used cars can come with hefty interest rates but an independent lender or credit union might offer a better rate. 

Leasing a Car Can Be a Great Way to Save, But Read Terms Carefully

This option can give you a few years of relief from an expensive car payment; inexpensive lease options are frequently offered on less popular or less-optioned new cars. There are caveats, of course: know the upfront fees and be sure you can afford them; the down payment can usually be hefty, and you don’t get that back at the end of the lease. Also consider how much you’ll actually pay over the life of the lease; is it really less than what you’ll make in payments over that same time?

Also understand what is due at the end of the lease; ensure the allowed mileage is sufficient to avoid overages at the end of the lease; and keep in mind that when the lease is up you don’t have an asset to trade—though you may be able to buy the leased car for a lower price, which will be stated in your lease contract. Read all the fine print—lease deals can be filled with lots of details that may make it not such a good option.

What Happens if Your Car is Repossessed 

If there’s one thing that will keep you focused on keeping your car payment current, it’s the pain of repossession. Because cars can be easy to track down and tow away, some lenders will repossess a car once a payment is more than 30 days behind. 

Laws differ from state to state, but you’ll likely owe fees for storage and towing, a fee to reinstate your loan, a fee to recover your car and more. Repossession tactics can be quite creative. 

If your car is repossessed and auctioned off and it sells for more than you owed, you are probably due the balance, but again, fees can likely eat up any overage. If it sells for less than you owed you are on the hook for the difference plus—you guessed it—the fees incurred by the repossession. And either way, it’ll hurt your credit score. 

Repossession, losing your car and all the dominoes that go with it are pretty horrible and worth not the risk. So stay proactive, research your options and stay ahead of things. And then go have pizza and relax knowing that you got this.