For most people, a car is a necessity rather than a luxury to get to work, school, or other everyday needs, and an auto loan is a great way to get behind the wheel.
However, sometimes it gets difficult to get out of your car debt and keep up with your monthly payments.
If you are also on the threshold of becoming upside-down on your car loan and looking for possible solutions to become debt-free, we are here to help.
In this post, we’ll discuss how debt works and share some best solutions to get out of your car debt as soon as possible. Let’s get started!
What is a Car Debt?
Car debt is a secured installment loan strictly used to purchase a vehicle.
The loan amount is paid in the form of monthly payments throughout the loan term, and the lender retains the ownership of the vehicle unless you pay back the principal amount in full, plus interest.
How Does Car Debt Work?
There are several ways to get car loans, including banks, credit unions, private lenders, car dealers, and other financial institutions.
Regardless of where you apply for the loan, the creditor will check your credit history, income, employment, and other debts you have before approving you for the loan.
Once you get approved for the car loan, the lender will pay the loan proceeds to the car seller, and you will pay back the money to the lender in monthly installments over the loan term.
The shorter the loan term loan, the higher the monthly payment and the interest paid, and vice versa.
Ways to Get Out of a Car Debt
If you no longer afford your monthly payments, here are some potential ways to get out of your car debt:
- Refinance Your Loan
Refinancing your car at a shorter repayment term with a lower APR would allow you to pay off the negative equity fast.
The less you pay in interest, the faster you will get out of your car debt.
The longer repayment term may also decrease your monthly payments, but with increased overall debt.
- Renegotiate with your Lender
Another way is to reach out to your lender and negotiate a new repayment plan.
Tell them about your situation and request them to make your monthly installments more affordable or stretch the loan term until you get back on your feet financially.
- Sell the Car
Though it is not ideal, you may also consider selling your vehicle. If you are unable to make the monthly payments, you are going to lose the vehicle anyway.
By selling the vehicle to a private party, you will get enough cash to pay for a down payment on a less expensive car.
- Voluntary Repossession
Returning a car is not a pleasant experience, but it is still better than repossession, which can wreck your credit score.
If you have defaulted on your car loan, and have no other options left, voluntarily surrender the vehicle to the lender and get a more favorable final pay-off.
Amit Gupta is the founder of National Planning Cycles, a company that helps startups, individuals, and small businesses with their financial planning. He has a vast amount of experience in the finance sector, having managed Google Play accounts for some of the world’s most successful unicorns. Amit is an expert in his field, and he uses his knowledge to help others achieve their individual goals.