Millions of people every year stretch their budget to take out personal car loans and finance deals so that they can purchase a new car. This can be an excellent idea if drivers have the time to shop around and make sure that they are getting the best deal around - with a good competitive interest rate (preferably 0%) and a reasonable deposit and monthly payment structure.
However, all too often motorists take out a loan then find that they cannot afford the loan repayments - sometimes because they borrowed more than they could afford to repay, and sometimes because their circumstances have changed beyond their control - and it's just not realistic for them to manage their monthly payments anymore.
So what can you do if this happens to you? This is a question faced by many people and it can be a very scary thing to think about – no-one wants to think about the prospect of losing their car.
Explore Your Options
Should I Stop Making my Monthly Payment?
While it can be a very tempting option, it's not a smart one - it will affect your credit rating and more importantly - it doesn't affect your obligation to pay one little bit. It ends up with you owing more money - with late and missed payment charges, big interest hikes, charges for reminder letters, and if the bank ends up repossessing the car they'll charge you for collection, admin costs and auction costs. Even if they sell it and put the funds against the debt they'll probably sell it way below its worth at auction - and you'll still owe them the difference at the end of the day so they'll keep chasing you until you speak to them. You don't want bailiffs turning up, so speak to your finance provider and let them know what's going on.
Work out your Figures
What you need to do first is sit down and work out exactly what you owe on the car. Ring the finance company you borrowed the money from and ask them for a settlement figure. When you know what this is, you can start to do something about it.
You might want to think about trading your car in for one that costs less. The dealer who sells you your replacement car will set you up with a loan that covers the full amount owed on your initial loan and whatever you need for the new (to you) car.
By doing this you can bring your payments down and/or spread them out over a longer period of time, reducing the immediate pressure on your finances - but do remember, you're paying considerably more for a car with less value - so you really need to consider whether or not that is something you want to do.
You may have decided that you don't want to have a car anymore or that you can't afford to run one. If this is the case, then have a look at cars of a similar make/model/condition to yours and see how much the going rate for them is. Also, check the value of your current car using our free online valuation tool so you know how much it is worth.
If you do decide to sell the car and you can't raise enough funds to clear the whole settlement you may be better off getting a small personal loan to make up the difference and clear the finance.
If you're only borrowing a small amount you should be able to get a favourable interest rate and you can bring your monthly payments down quite a lot doing this. Of course you do need to make sure that you can afford the second loan payment!
Also make sure that you inform your finance company before you make any moves to sell the car as it is legally their property and may show up on searches that potential buyers pay to have carried out.
Handing the Car Back
If you have a car finance arrangement then you also have another option that isn’t available to people with a personal loan. In most car finance deals there is a clause that states that after a certain amount has been paid (usually around 2/3 of the total price) or after a certain amount of time has passed with the loan account being managed in good order – with payments made on time, etc, then the borrower has the right to return the car to the financier.
The lender will do a number of checks on the car, arrange the admin, and then take the car and resell it – leaving you arrangement free without any further commitment. If for any reason your car isn’t worth as much as the remaining loan amount then the lender may take the car back and leave you with a small balance to pay – which is frustrating because you’re paying for something you don’t have any more – but it is a legal way of getting out of finance deal that you know you’re not going to be able to manage with.
Most importantly, communicate with your lender. If you’re in financial trouble then they are there to help you. Write to them and explain your circumstances – some lenders will reduce payments for a few months to allow you time to get back on your feet. If you have no joy with them, then visit your local CAB and get some specialist advice.
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Disclaimer: The information in the article is for general purpose information only and should not be constituted as legal advice. This article has been produced by a third party and Jardine Motors does not take any responsibility for the completeness, accuracy, or reliability with respect to the website or the information provided. Article last updated September 2020.