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What happens if I can’t pay my car loan?

woman shocked because can't pay car loan

There is no doubt about it, cars can be expensive. But for many Aussies access to a car is essential, so the thought of not being able to pay off a car loan can be pretty stressful.

But don’t worry, there are a few options if you can’t pay your loan that can prevent you from handing over your keys for good. 

Option 1: Negotiate with your lender

Calling up your lender to talk about your financial trouble can seem like an awkward and, let’s be honest, uncomfortable conversation. But it’s not an unusual situation to be in and ultimately it is in the lenders interest to find a way to help you pay.

With this in mind, there are a few things that you need to find out from your lender before making any rash decisions like hiding your car in the garage. Here’s a checklist of questions to consider before you make the call so that you know that you’re covering all your bases:

  • How much do I owe? It’s extremely important that you are aware of the exact amount that you owe for your car loan payment so that you can make a proper assessment of whether or not you can realistically pay it back.
  • Do I have positive equity on my car? In the rare instance that you may have positive equity on your car, it means that the car is worth more than the amount you owe for your car loan. Say you owe $7,000 to your car loan lender and a car dealer offers you $10,000 for your vehicle - this means the dealer will take your car, you can pay back your loan straight away and even use the remaining $3,000 for a new vehicle if necessary. The added bonus of having equity on your car is that you won’t see any damage to your credit score.
  • Can my lender repossess my vehicle? Another thing to look into if you are financially stuck is whether or not your car is the security for your car loan - this means finding out whether or not you have a secured or unsecured loan. For secured loans you must provide an asset (your car) as a guarantee for the loan, which means your car can be seized by your lender if you don’t make payments. But don’t worry, if you have a personal loan you should receive a 30-day period to pay back what you owe before the car is taken. On the other hand, if you’ve taken out an unsecured loan, there is no asset on your loan so your car cannot be seized by your lender without a court order. You are also able to voluntarily surrender your car, however like repossession it will affect your credit score.
  • Do I have the option to make a new payment arrangement? When you contact your lender, it may be worth speaking to the financial hardship department to try and negotiate a payment scheme that you can afford. Under law your lender must reasonably consider your request - if they agree, make sure you get it confirmed in writing so you have physical evidence of the new arrangement, and if they decline, you can apply for an External Dispute Resolution and lodge a complaint if you feel it’s necessary.

Option 2: Refinance your car loan

In order to lower the amount you’re making in monthly repayments on your car loan, refinancing may be the better option for you.

While you may have the option to refinance with your current lender, it may actually be more cost effective to go with another lender to get a low interest car loan

So, how does it work?

The money borrowed to refinance your car loan will cover the entire amount of the loan which means you can completely pay it off. But don’t celebrate too soon, it doesn’t mean your debt-free just yet.

After you’ve paid off your original loan, you will then enter a new agreement with your new lender and will be required to make regular payments - keep in mind that the account you held with your old lender should be closed once the balance has been settled.  

Take this for example. According to the Mozo car loan repayment calculator, if you took out a car loan of $20,000 over a term of 5 year at an interest rate of 9.00%, you would cough up $415 in monthly repayments and end up paying a total os $4,910 in interest.

However, if you decide to refinance your vehicle with a new loan at an interest rate of 7.00%, you’d instead make $396 monthly repayments and pay $3,761 in interest over those five years. This option would save you a total of almost $20 a month and $1,149 in interest overall.

Ultimately, refinancing aims to make payments more manageable from month to month, but be aware that it does extend the length of the loan all together, or cost you more in fees. As you may know, increasing the time that you pay back your car loan means that you could pay more in interest at the end of day. But for people who have a good credit score, and have previously met their loan repayments, you may be able to negotiate a lower interest rate on a new loan.

Option 3: Sell or trade your car

Whilst you may love your current set of wheels, it may actually be time to face the fact that selling or trading could be your only option if you’re worried about your car loan. In cases where you are able to make alternative arrangements for everyday travel like public transport or downsizing your vehicle, you could save a lot of money.

  • You are certain that you can no longer make your repayments on your car loan
  • You don’t use your car everyday - for things like work or dropping the kids to school
  • You have access to public transport
  • You have the flexibility to downsize or go cheaper

If you decide to sell your car privately, you will have a couple of disclosure obligations to both the buyer and your current lender. First of all, you must receive permission from your car loan lender to sell your car, and secondly you must let the buyer know that the car is under finance. When a sale price is negotiated and agreed upon by all parties, you then need to organise how your lender is being repaid and settle the balance if the car sold for less than what you owe.

Another option to consider is giving the car back to the lender to sell for you. In this case you should take photos of the car to prove it’s condition at the time of hand-over and research the value of the car to ensure you are getting the best price. In the same way as private selling, once the lender has sold your car you are required to pay any outstanding balance depending on the sale price of the car.

RELATED: How to sell a car with an outstanding loan

5 quick tips to stay on top of your car loan

1. Sort out a budget: Get your finances in order and have a clear idea of how much you can realistically afford before taking out a car loan. Stick to this framework and ensure that your car remains affordable so you don’t get stuck in a situation where you can’t pay.  

2. Do your research: Doing the sums and comparisons between dealer finance and car loan lenders can be the difference between getting a great deal and being caught out in an expensive situation. Knowing what you want before you get to the dealership will make a world of difference and enable you to stick to your budget.

3. Choose the right rate type: If you go for a fixed rate car loan, you can potentially secure a reasonable rate that is ongoing for the duration of your loan. Knowing how much you need to pay every month can help you with budgeting to ensure you make those monthly payments every time. But it’s also important to consider variable rates that tend to be cheaper, but can fluctuate over time, so make the decision that is most likely to help you.

4. Extra payments: You may have more money one month than another, so bonus payments are a good feature to have as part of your car loan in case you want to pay it off a little quicker.

5. Be mindful of fees: Choosing a car loan with minimal fees can mean you save in unnecessary costs, giving you more cash to help you make your monthly payments. You won’t find a loan completely fee-free but compare between providers and assess where you can save the most on the type of car loan you need.

If you’re looking for a more tips on how to get a great deal on a car loan read our Car Loan Tips and Tricks or head on over to our Car Loan Hub for more reviews, guides and articles that could help you.

Polly Fleeting
Polly Fleeting
Money writer

Polly Fleeting is a personal finance writer here at Mozo, specialising in loans and credit cards. Her work is aimed at helping people find ways to make smart product choices, reduce debt and get more for their hard-earned dollars. Polly has a degree in Journalism from the University of Technology, Sydney. She is also ASIC RG146 (Tier 2) certified for general advice.