If you’re in danger of defaulting on your car loan, you’re not alone. Subprime borrowers are falling behind at the highest rate since 2010. Before you default, make sure you’ve explored these possible options, though.
A subprime loan is basically a loan that banks give to people with bad credit. It happened in 2008 with houses, and now, lenders are giving out subprime car loans to many people who can’t afford to pay them back. The Washington Post reports:
Borrowers are falling behind on most subprime car loans, but deep subprime consumers — those with credit scores below 550 — have deteriorated fastest, according to a report by Morgan Stanley.
Just like mortgages, many of those loans have been packaged into bonds, “securitized” in Wall Street parlance, and sold across the world to investors searching for yields in the wake of the financial crisis. Car loans was one of the best performing assets during that period.
Sounds familiar, right? The good news is we probably don’t have to worry about a bubble bursting. According to the Washington Post, the car loans market only makes up a fraction of the mortgage market. Plus, a defaulted car loan is easier to recover from than a defaulted mortgage.
That may be little solace if a default is in your future, though. Defaulting can make your credit even worse. Before you default, explore these options.
Talk to your lender: Your lender wants you to keep giving them money, so before anything else, talk to them. See if you can extend the length of your loan for a smaller monthly payment, negotiate your interest rate, or even get a 30-day deferral (which is basically more time to pay off your loan). It may be a long shot, but you never know, they might be willing to work with you.
See if you can sell it or trade it in: Do you have equity? Check the car’s value. If it’s higher than the amount you owe, yes, you have equity and you may be able to sell your car and pay off your loan. This way, your credit will remain intact and, as Edmunds points out, you may pocket some cash for a down payment on a more reasonable amount. If you’re underwater (you owe more than it’s worth), you may also be able to trade in your car for a cheaper one with a lower monthly payment. Do the math, though. You don’t want your payments to be just as high on the new loan, which would make the whole endeavor pointless.
Find someone to take over your payments: There are peer-to-peer lease exchange sites like Swapalease and LeaseTrader. Here’s how they work: you need to get out of your lease, so you post your vehicle on the site. If someone else likes the terms and your car, they can take over the lease, assuming they qualify and the bank allows it.
Refinance your car loan: You might be able to get a new loan with a lower interest rate or at least lower monthly payments. However, the new loan might just extend the life of the loan, meaning you’ll pay more over time. If you’re struggling to get by or you really need your car, the relief might be worth it. But it’s something to be aware of nonetheless. There are also peer-to-peer lending sites like Lending Club and Prosper where you may be able to get a better loan than you’d get with most traditional lenders.
You should also know the impact a default will have on your credit, too. According to Autos.com, it can drop your score up to 100 points (typically, the higher your score, the bigger the drop) and it will typically stay on your report for seven years. Of course, this makes it harder to get a loan down the road, plus, bad credit makes your life more difficult in other ways, too. If you do default, it’s time to rebuild your credit, and the first is understanding the impact of the default.