If you’re worried that you can’t make a car loan repayment, it’s best to take control of the situation as soon as possible. Don’t wait until you miss a payment. There’s a lot you can do to get back on track — and to make sure you don’t lose your car!
What happens when you don't pay your car loan?
Some things in life aren’t really in your control — sickness, a relationship breakdown, losing your job or having your work hours reduced, or unexpected expenses when a refrigerator, computer or something else breaks down.
Unexpected things like this can make it hard to find the money for your next car repayment.
It’s important to understand what will happen if you miss a repayment.
Will I lose my car?
Naturally, your biggest fear will be losing your car. But lenders don’t want to repossess your car. They will work with you to get things back on track.
Nevertheless, there are circumstances where you could lose your car. Let’s discuss those now, before we talk about how to stop it from happening.
If you took out a secured car loan, then you agreed to provide the car as collateral. This means that the lender can repossess the car and sell it to recover their money.
If your car is repossessed, your credit score will be damaged. This can make it harder to borrow money in future.
And if the lender sells the car for less than you owe, you will still be liable to pay the remaining amount!
Even if you have an unsecured loan, the lender can seek a court order to seize the car.
But it’s not like TV or the movies!
- if you’ve paid back a lot of your loan and/or you don’t owe much, it is more difficult for the lender to take the car
- a lender can’t enter your property to take the car unless they have your permission or a court order
- lenders must provide you 30 days’ notice before they repossess the car, so you have time to work something out
- the lender must wait 21 days before selling a repossessed car, so you still have the chance to get it back or to arrange for its sale to get yourself out of debt.
You can learn more about vehicle repossessions here.
What should I do if I can't pay?
The first thing to do is work out just where you stand:
- how much you have paid back
- how much you owe
- whether you will be able to pay back the loan if you have more time.
Then you have a few options.
A financial hardship arrangement
Talk to your broker or lender. It’s in their best interests for you to continue to pay off the car loan. They will be motivated to assist you. In fact, under the law they must consider your request for help.
For example, they can agree to a Financial Hardship Arrangement and:
- give you more time to pay off the loan
- vary your repayments to better match what you can afford to pay.
Refinancing involves taking out a new loan to pay off the old loan. Usually, the new loan will be over a longer period of time, and you will pay more interest overall.
However, you may be able to refinance with a lower interest loan. This would usually involve switching to a different lender.
You can use an online loan calculator to see how different interest rates and loan terms would affect your repayments.
Selling the car
If you cannot see how to get back on track with your repayments, you might need to sell your car or trade down to a cheaper one.
If you decide to sell, make sure you have a plan for how you will get around.
You need your lender’s permission to sell the car and you must tell the buyer there is still money owing.
You and your lender will need to agree how the balance of the loan will be repaid when the car is sold. An alternative is to return the car to the lender to sell.
What shouldn’t you do?
If you’re feeling stressed, your judgement might be compromised. There are some things you generally shouldn’t do:
- Don’t ignore the problem.
- Don’t dig yourself in deeper by taking out payday loans.
- Don’t increase your credit card limit — you’ll be paying a much higher rate of interest than you do on a car loan.
- Don’t let stress impact your health — seek support from friends, family or professionals.
In particular, if you’re tempted by payday lending or to take on more credit card debt, talk to a financial adviser.
Are car loans compound-interest?
Most car loans are simple-interest. This means the interest rate is used to calculate the total cost of the loan (repayments plus interest). Then, that total is divided up to work out your weekly or monthly repayments.
Simple-interest loans let you easily see what your repayments will be.
Compound-interest loans charge interest based on the amount still owing each week or month. For example, home loans are compound-interest. In the early years of a home loan, you are mainly paying interest, and not making much of a dent in the principal (the amount you borrowed).
Think about whether a fixed-interest or variable-interest loan suits you best. With fixed interest, your repayments and total costs won’t change. This helps you budget and provides the comfort of knowing exactly what your repayments will be for the life of the loan.
A variable-interest loan often offers a lower interest rate to start with, but that rate can change, which means you risk your repayments going up.
Get back in control
We all have ups and downs in life. When it comes to your finances, you need to stop short-term problems from turning into bigger issues. If you’re worried about getting into financial trouble, there’s some simple ways to stay in control.
- Access free financial or legal advice. You can phone or chat online with free counsellors from the National Debt Helpline. You can also access free community legal centres or legal aid agencies. You can find their details online.
- Review your income and expenses. Know what you can afford. Don’t sacrifice your lifestyle to get a more expensive car. Don’t commit to a loan that you can’t comfortably repay.
- Prioritise your expenses. Paying your mortgage, rent, electricity bill and car loan are all important. Think about whether there’s indulgences or less important expenses that you can eliminate, at least for a while.
- Find the best loan deal. You want the lowest fees and lowest interest rate. If you don’t want to run around collecting details from lots of different lenders, think about using a broker. They will compare options for you. The same goes for refinancing an existing loan.
- Factor in ongoing costs. Owning a car means you must pay registration, insurance, petrol and maintenance. Don’t forget to factor in these expenses when deciding what you can afford.
- Talk to your lender if you are having difficulties. Your lender will want to help.