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Sometimes a car loan can be a bigger burden than you expected. The interest rate is too high, the payments are too expensive, and you don’t have enough money to pay all of your bills and your car loan, too.
When your car payments are too steep, settling the debt could be one way out. A car loan settlement is an agreement between you and your auto lender that states they’ll settle your loan for less than the total amount owed. While it may help you escape a costly car loan, settling a debt can also harm your credit. This article will help you learn tips for negotiating a settlement and what it means for your finances.
When settling a car loan, you negotiate with your lender to find a payment amount they find acceptable for discharging the debt. For example, imagine you took out a loan for $25,000 two years ago, and you still owe $19,000. You’re three months behind on your payments. You might ask the lender if they’d accept a settlement of $16,000 if you paid it all in one lump sum within the next 30 days. The lender might agree to that settlement offer, or they might decline it, or they may counter and say “$18,000” instead.
Car loan settlements are often used when someone is struggling to make their payments. It’s a way to give the lender at least some of what you owe, even if it’s not the full amount. It can also allow you to keep your car and avoid repossession.
You’ll still be on the hook to pay whatever lump sum you negotiate. That money might come from a few places — savings, a personal loan, borrowing from family, or selling another asset. Some borrowers even use debt settlement companies, though those often charge fees.
Before you jump straight to negotiating with your lender about your debt, make sure you’re prepared. Follow the steps below to learn how to negotiate a car payoff settlement for the best outcome.
First, make sure you understand what remains on your car loan – including any late fees or penalties. Check your most recent statement, view your online account dashboard or call your lender to find out your payment amount. You’ll also need to determine how much you can afford to pay toward a settlement.
Contact your lender to let them know you’re struggling financially. Ideally, you’ll communicate that as soon as you find yourself having a difficult time making your payments. Explain your situation, such as if you’ve had a recent job loss or unexpected medical bills. Ask whether they can work with you on a hardship plan and make it clear that you want to find a solution to your problem that also works for the lender.
Once you know how much you can afford to pay, propose a settlement offer. This would be one lump sum amount that you can afford, and the lender might accept instead of repossessing your car. If you can offer a lump sum to be paid right away, it might be more appealing to the lender than waiting around for small amounts to trickle in from you.
Settling a car loan can be a way to escape expensive debt, but it’s not without its downsides, some of which can have serious consequences for your financial situation. Think carefully about the pros and cons of settling your car debt before you move forward with this option.
Of course, this also assumes you have the cash to settle the loan. Coming up with enough money to send your lender to settle the debt might be extra challenging if you’re already struggling financially.
If a car loan settlement isn’t the right path forward for you, there are other options.
Refinancing car loans is a common strategy to lower your car payment. Refinancing involves taking out a new loan, which pays off and replaces your old car loan. Many lenders offer refinance auto loans with affordable rates, and refinancing won’t harm your credit the way a car loan settlement can.
Loan modification is another strategy to ease the burden of expensive auto loan debt. You keep the same loan, but you negotiate with your lender to change the terms and make it more affordable.
Voluntary repossession is a third method, but it should really be your last resort. When you voluntarily surrender or give up your car, it’s still considered a default and can hurt your credit. Plus, the lender often will put your car up for sale at auction or to a wholesale market. Whatever they get they’ll apply toward your loan. If there’s a balance remaining after that, you’ll still need to pay it.
The following are some of the most frequently asked questions about car loan settlements.
Yes, a car loan settlement will negatively affect your credit score. That’s because you’re not fulfilling your side of your loan agreement. A settlement can stay on your credit report for seven years. However, if the car loan is truly a financial burden, it might be worth it to you to take the hit to your credit.
A car loan settlement is essentially a form of debt relief specifically for auto debt. By settling your car loan, you and the lender agree to a plan that will relieve you of the debt. You’ll still owe the lender, but the amount may be less than you would owe otherwise.
Yes, you can and should negotiate with the lender to find a solution that works for both of you. That might mean negotiating a settlement amount that’s smaller than your remaining balance, but it can also involve arranging a payment plan that works for your budget and the lender’s bottom line.
It can take weeks or months to submit your proposed offer and negotiate a settlement with your auto loan lender. If you’re struggling to make your loan payments, make sure you contact your lender right away. Waiting can add penalties, fees and interest to the amount you owe.
Explore how a car loan settlement can impact your finances and credit rating, providing insights into this crucial decision for borrowers.
