Car payment trouble? How to turn it around

By SEAN PYLES

NerdWallet

Your monthly car payment is not only a ticket to freedom, letting you enjoy summer road trips, but also a lifeline that gets the kids to school and you to work.

But if it consumes too much of your budget, your ticket to ride could turn into a ticket to financial trouble. More than 7 million Americans were “seriously delinquent,” or more than 90 days late, on their car payment at the end of 2018, according to the Federal Reserve Bank of New York. And 2.4 percent of loans went into serious delinquency in the final quarter of 2018, up from 1.5 percent in 2012.

If you’re struggling with a car payment, dig into your budget and options. Then, take action.

“The first thing someone struggling with a car payment should do is re-evaluate where their money is going,” says Chicago financial coach Shanna Due.

Car expenses go beyond your monthly loan payment. The total cost of ownership includes insurance, gas and regular maintenance. In general, aim to spend less than 10 percent of your take-home pay on your car loan and less than 15 percent to 20 percent of it on overall costs.

Total up what you’ve paid on all car-related costs over the past three months to get a clearer picture of your total ownership costs.

Next, try to trim your auto expenses. Get insurance quotes to see if you can find similar coverage for less, and take on small repairs or maintenance tasks yourself. If needed, expand your cost-cutting to the rest of your budget.

Use what you learn about your car budget to understand your payment trouble: Was it a one-time blip or the sign of an unaffordable loan? You have a few remedies to get back on track if you’ve just missed a payment or are a few months behind. Act fast to limit damage to your credit and to avoid repossession.

Was it short term?

You just overlooked the bill: Pay what’s needed to bring your account current as soon as you can. See if you can automate future payments to avoid mistakes.

You were temporarily short of cash: Maybe a job loss or a big expense made your loan unaffordable in the short term. If so, you can ask your lender for forbearance, where it suspends payments for a few months and lengthens your loan by a corresponding time. You’ll pay more in interest over the life of the loan but get temporary relief while you catch up.

Is it a long-term problem?

If you simply can’t afford your car and need to make big changes to your monthly auto expenses, first determine if you have equity.

To do this, find the current value of your car. If your car is worth more than you owe, you have equity. If it’s worth less than you owe, you’re “underwater” – and you have fewer options.

“Equity is code for ‘I can escape,’” says Matt Jones, senior consumer advice editor at automotive website Edmunds.com. “If you have equity, you can sell it without too much of a problem and thus can fix the problem.”

Once you know your equity standing and how you want to manage your car loan, work to resolve the problem. For an unaffordable car, it’s best to downsize or refinance your loan.

Call your lender if you want forbearance or to extend your loan terms.

“The banks are so eager to work with people because they do not want these cars back,” he says.