What to do when you can’t pay your car loan

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. Financial challenges can make your monthly car loan repayments difficult to manage. Whether it's a job loss, medical emergency, or other significant life event, finding yourself unable to pay your car loan can feel overwhelming.

Fortunately, there are some steps you can take to tackle the situation and ease the financial pressure.

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.

Depending on your circumstances and their policies, the lender might offer different options, such as:

• Extra time to repay the loan
• Reduce your payments based on what you can afford
• Give you a repayment holiday for a few months so you can get your finances back on track

While your lender should work with you to help you repay the loan and avoid financial hardship, the key is to communicate as early as possible to prevent falling deeper into arrears.

It may also help 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.

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.

Most car loans are secured against your car as collateral 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 voluntarily 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 affects 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.

Now that you know what to do if you can no longer afford your car loan, it's worth reiterating the importance of securing an appropriately-sized loan to avoid this situation in the first place. While you may fancy a particular set of wheels, it's crucial to assess the cost of the vehicle against your budget to ensure affordability.

Beyond the car’s purchase price, consider additional expenses, and remember that the car loan you choose can also impact the total cost to you. While comparing interest rates is a great place to start, don’t forget to also evaluate loan features and fees to find an option that best suits your situation.

For instance, if you’re considering a hybrid or electric vehicle, you might qualify for a green car loan with a lower interest rate or reduced fees. Always compare your options thoroughly to find the deal that fits your financial requirements.