What to do if you are struggling to pay your car loan

With car loan debt at a new high, a report shows the impact as Americans struggle to make their auto payments: a large increase this year in the number of borrowers who are in delinquency.

Auto loan debt rose to $1.6 trillion in the third quarter of 2023, a $13 billion increase from the previous quarter, according to data from the Federal Reserve Board of New York’s report on household debt and credit The number of borrowers who fell more than 90 days behind on their auto loans rose to 2.53%— a 25% uptick from what it was the same time last year.

One of the key reasons auto loan debt is at a historic high is that “car prices have increased in recent years, so consumers are taking out bigger loans and often for longer terms,” said Caleb Cook, vice president of consumer lending at Digital Federal Credit Union, via email.

The average price of a new car was $47,899 in September 2023. For comparison, the average new car sold for $37,590 in September 2019.

What you can do to mitigate your debt

If you’re struggling with auto loan debt, there are some steps you can take to alleviate the strain. 
 
When you refinance a car loan, you’re getting a new loan to pay off and replace your current one. This can be a good option if you're struggling to make auto loan payments because you can refinance to a longer loan term to reduce your monthly payments, or potentially get a lower interest rate.
Keep in mind that while refinancing to a longer loan term to lower your monthly payment can make things more manageable in the short run, it may also mean that you’ll pay more interest over the life of the loan.
A borrower will typically need a good credit score to refinance to a lower-interest loan. While it's possible to refinance with a low credit score, it may be more difficult to get a loan with better terms than you have on your current loan.

Hardship programs

Many lenders offer hardship programs that provide assistance to borrowers who can’t afford to make their loan payments.
Hardship programs typically offer assistance in the form of due-date changes, loan deferral or forbearance (which is pausing or skipping payments until a later time). They may also allow you to temporarily reduce your interest rate or payment amount.
It's important to reach out to your lender for help as soon as possible — not when you’ve already missed multiple payments.

Sell your car

Those who can no longer manage to make car payments might consider selling their car or trading it in for a less expensive one.
If you’re trading in a car you still owe money on, first determine if you have positive or negative equity. If you owe less than your car is worth, you’re in a good position because you can apply the difference toward the purchase of a cheaper car. If your car is worth less than what you owe, however, you have negative equity and you’re upside-down on your car loan. This means that when trading it in, you’ll have to pay the difference between what you owe and how much the new car is worth.

While opting for a cheaper car can save you money, if you’re significantly upside-down on your car loan, wait until you have equity in the car before trading it in.

Voluntary repossession

When you voluntarily repossess your car, it means you're willingly surrendering it to the lender. This may be a last resort if you’re at risk of losing it involuntarily. When surrendering a car this way, the lender will resell the car and you must pay back the difference between how much it's sold for and the amount you owe on it.
Voluntary repossession can have a negative effect on your credit and you may incur some late payment charges. However, giving up your car this way can be less expensive and less damaging to your credit than if your car is forcibly taken.