Facing a car repossession can be a stressful experience. If you’ve defaulted on your car loan, lenders have the right to repossess your vehicle. Beyond losing your car, you might also be liable for a deficiency, which is the remaining loan balance after the car is sold, potentially adding to your financial burden. However, there are steps you can take to prevent a repossession and explore options to resolve your debt.
This article provides a comprehensive overview of strategies to help you keep your car, manage your car loan debt, and understand your rights to protect yourself from deficiency judgments. It’s important to remember that each situation is unique, and while these options can be helpful, it’s crucial to assess your individual circumstances carefully.
Catch Up on Missed Payments
Being late on a car payment doesn’t immediately trigger a repossession. Loan agreements vary; some define default as being just one day late, while others allow a grace period, like 30 days or more. Even if you are late, official default often occurs only after the lender formally notifies you, usually in writing.
If you’re still within the grace period and not officially in default, the most straightforward way to avoid repossession is to bring your loan current. Carefully review your loan agreement to understand the terms and conditions. When making up late payments, ensure you include all accrued late fees and any other applicable charges. Failing to pay the full amount due, including fees, might still leave you in default.
While consistently catching up on late payments might seem like a solution, it’s a risky approach. Although a lender might have implicitly waived their right to declare a default by repeatedly accepting late payments, they are not obligated to continue doing so. Relying on this leniency is not a sustainable strategy and could change without notice, putting you at risk of repossession.
Reinstate Your Car Loan
Even if you have officially defaulted on your car loan, you might have the option to reinstate it. Loan reinstatement allows you to bring your loan back into good standing, preventing repossession or recovering your vehicle if it has already been repossessed.
Reinstatement involves paying a lump sum to cover all past-due payments, including any associated fees and late charges. This process is also known as “curing the default.” However, the right to reinstate isn’t universally guaranteed. Some state laws explicitly grant borrowers the right to reinstate their car loans. Even if your state doesn’t mandate it, your specific loan agreement might include a clause allowing reinstatement.
It’s important to note that reinstatement, where available, often is a one-time opportunity. If you default again after reinstating your loan, you may lose the chance to reinstate it a second time, making it crucial to manage your finances responsibly moving forward.
Redeem Your Repossessed Car
After your car has been repossessed, you generally have what’s known as a right of redemption. This right allows you to reclaim your vehicle by paying off the entire outstanding balance on the car loan. The redemption amount, or “payoff amount,” typically includes not only the principal and interest still owed but also repossession fees, storage costs, and potentially even the lender’s attorney fees.
However, the window for redemption is limited. Your right to redeem your car ends once the vehicle is sold by the lender. This means you need to act quickly if you intend to redeem your car.
Downsides of Redemption. Redemption can be financially challenging. If you were struggling to make regular monthly payments, it’s likely that coming up with the full payoff amount, which is significantly larger, will also be difficult. Furthermore, redemption might not be financially sensible if the payoff amount exceeds the car’s actual market value.
Upsides of Redemption. Conversely, redemption can be a beneficial option if the remaining loan balance is relatively low, or if the payoff amount is less than the car’s worth, meaning you have substantial equity in the vehicle. Redemption becomes particularly attractive if you believe you could sell the car privately for more than what the lender would get at auction, allowing you to recover some of your investment.
Negotiate with Your Lender
Direct negotiation with your lender can sometimes lead to alternative solutions for getting your car back or reducing your debt. Consider exploring these negotiation strategies:
Sell the Car Yourself to Pay Off the Loan
Lenders typically sell repossessed vehicles at auctions or dealer sales, which often don’t fetch the car’s optimal market price. If you can find a private buyer willing to pay more than what the lender expects to receive at auction, selling the car yourself can be a better strategy. Lenders might be open to this because it saves them the costs associated with resale, such as advertising and storage.
However, this option presents challenges. Time is usually limited, and you need a buyer with immediate cash or financing. Crucially, you need the lender’s cooperation. A lender can refuse to agree to a private sale for various reasons, or even without a specific reason. However, if the lender unreasonably refuses a sale and then sells the car for significantly less than your private buyer offered, you might be able to use this as a defense against a deficiency claim.
Voluntarily Surrender the Vehicle
If you are in default, frequently late on payments, or simply want to get out of the car loan, surrendering the vehicle voluntarily can be an option. Ideally, before surrendering, you should negotiate with the lender for a written agreement to waive or reduce the deficiency balance. The lender’s incentive to agree is that voluntary surrender saves them the time and expense of repossession.
Caution: Never surrender your car without a written agreement regarding the deficiency. If you simply give back the car without a clear agreement, the lender may still pursue you for the full deficiency balance after selling the car.
On the other hand, if repossession costs are likely to be passed on to you anyway, voluntarily surrendering the car, even without a deficiency waiver, might still be financially advantageous in the long run by potentially minimizing overall costs and debt. Your individual financial situation will determine if surrendering the vehicle is the right choice.
Leverage Lender Missteps in Negotiation
You don’t have to wait for a lawsuit to negotiate a settlement. If you believe the lender violated your rights during the repossession or sale process, you can use these potential legal defenses and counterclaims to negotiate with the lender. You might be able to persuade them to return the car, reinstate the loan, allow redemption, or reduce or eliminate the deficiency balance by highlighting these issues.
Refinance Your Car Loan
Refinancing your car loan involves replacing your existing loan with a new one, ideally with more favorable terms. Your current lender, or another lender, might offer refinancing options, often extending the loan term.
While lower monthly payments from refinancing can be appealing, especially when struggling financially, consider the long-term implications.
Factors to consider when refinancing:
- Finance Charges: Is the new interest rate lower than your original loan’s rate? Higher rates will increase your total repayment costs over time, even with lower monthly payments.
- Vehicle Depreciation: Cars lose value over time. Refinancing a loan for several more years on an already aging vehicle might not be financially sound, especially if the car’s value is rapidly declining.
- Upfront Costs: Will you need to make a down payment on the new refinance loan? This adds to your immediate financial burden.
- Refinancing Fees and Penalties: What are the associated costs of refinancing, such as origination fees, prepayment penalties on the old loan, and other charges? These can offset any potential savings from a lower interest rate.
Consider Bankruptcy
For individuals facing overwhelming debt, including car loan debt, bankruptcy can be a viable option. Filing for bankruptcy provides immediate legal protection by temporarily halting:
- Car repossession efforts
- Collection activities for deficiency balances
- Deficiency judgment lawsuits
- Wage garnishments or bank levies related to deficiency judgments
The two primary types of consumer bankruptcy are Chapter 7 and Chapter 13. Both offer protection against deficiency collection, but they impact your car loan differently. Neither type of bankruptcy allows you to keep your car without making provisions for payment. To understand the specific implications of each type of bankruptcy on your car loan, research Chapter 7 and Chapter 13 bankruptcy and car repossession to make an informed decision about your situation.
Further Reading
- Illinois Wage Garnishment Laws
- New York Wage Garnishment Laws
- Repossession: What Creditors Can and Can’t Take
