By Sean Pyles
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 over 90 days late, on their car payment at the end of 2018, according to the Federal Reserve Bank of New York. And 2.4% of loans transitioned into serious delinquency in the final quarter of 2018, up from 1.5% in 2012.
If you’re struggling with a car payment, dig into your budget and options. Then, take action.
Understand your car budget
“The first thing someone struggling with a car payment should do is reevaluate 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% of your take-home pay on your car loan and less than 15% to 20% 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.
“Once they’ve reevaluated where they are (with their car budget), can they modify the rest of their expenses to make their car costs fit in,” Due says. “If not, begin to look at an exit plan.”
Diagnose the problem
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.
It was a short-term issue:
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.
It’s 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.”
If you have equity: You could sell and get a less-costly car. Or, you could try to refinance. Check credit unions, banks or online lenders to see if you can refinance your loan at a lower interest rate and make your payment more manageable.
If you don’t have equity: When the balance of your loan is more than the value of the car, you’ll have to make up the difference to get out of the loan. If you want to sell or refinance, be prepared to pay the difference in cash or by taking out a small loan.
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. Both options will cost you more in the long term but can make payments more manageable. Regardless of your equity, lenders will likely work with you, Jones says.
“The banks are so eager to work with people because they do not want these cars back,” he says.