With the proper planning, a job loss doesn't have to lead to a car loan default. Like the saying "hope for the best, prepare for the worst," losing a job isn't something anyone wants to think about, but it's something everyone should be prepared for if they have an auto loan.
Communicate with Your Lender
The first step to saving your car loan in the event of a job loss is to communicate with your lender. Your lender doesn't want you to default on your auto loan. In many cases, they may work with you to come up with a temporary solution to make your loan affordable during the hardship.
For a short-lived situation, your lender may help you by offering a deferment. In deferment, a payment can be skipped without penalty for a short time. Your missed payment is then added to the end of your loan. If you're in good standing, your lender may allow you to defer a payment for 30 to 60 days.
If deferment isn't an option, your lender may be able to help you restructure your loan. In a restructuring, your lender extends your loan term in order to lower your monthly payment to something more manageable. Similar to refinancing, you typically negotiate an entirely new loan contract with a lender.
Another option that may be available in some cases is auto loan assumption. This process allows someone else to take over the car loan, and ownership of the vehicle, under the same terms as the original borrower. This option isn’t offered by all lenders, and the new borrower has to qualify for the loan under the same terms as you did. Generally, loan assumption is more commonly seen with leased vehicles.
Avoid These Tactics if You Lose Your Income
Losing a job can be stressful, and so can the prospect of losing your car. Even though you may be grasping for anything that could logically help in this situation, there are a few things to avoid altogether. These include:
- Doing nothing – You run the risk of default if you stop paying on your auto loan. This affects your credit in more ways than one: each missed payment that gets added to your credit reports can drop your credit score, and once the vehicle is repossessed by the lender, the negative effects of this remain on your credit reports for 10 years!
- Giving the car back – Returning a vehicle that you feel you can no longer afford may seem like the right thing to do, but, in reality, you're just speeding up the repossession process. The act of returning a car you can no longer afford before your contract is up is called voluntary repossession, and it affects your credit just like a normal repo.
These options not only add to the issues you're currently facing with the loss of employment, but they impact your ability to get a loan or any line of credit in the future. If you're unable to get help from your lender, and are trying to avoid the negative effects of repossession, you can always consider selling the vehicle.
Selling Your Car for Profit
If there's equity in your car, meaning what you owe is less than or equal to what the vehicle is worth, you have the option to sell it privately or to a dealership. At best, your profit might be large enough to allow you to buy an inexpensive car for cash after you pay off the loan.
Once You're Back on Your Feet
If you weren't able to keep your vehicle after a job loss, it's likely you need auto financing again after the dust settles and you're back on your feet. You should know that you don't need to worry about a lower credit score or a fresh job standing in your way if you find the right kind of lender to work with.
Chances are you're going to need a subprime lender – the type that looks beyond credit scores to help people get loans, even if they're struggling with bad credit, no credit, bankruptcy, or repossession. Here at The Car Connection, we work with a nationwide network of special finance dealerships with the lending resources to help once you're ready for an auto loan.
You can visit us to research new and used vehicles, or use our free car loan request form to find a local dealer near you that can help. In the meantime, if you've lost your job, but don't want to lose your vehicle, keep talking with your lender. Remember, you don't have to lose your car in every case.