What to do if you can’t afford your car finance payments

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Expert James Fairclough, CEO of the used car platform AA carsdiscusses the options available to drivers who are struggling to meet their auto finance obligations

The cost of living crisis is forcing many people to take a close look at their monthly expenses and save where they can. But as financial pressures from rising energy, food and fuel bills tighten, some are beginning to see their financial commitments becoming prohibitive.

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More than two million cars were financed in the 12 months to February, according to the Finance & Leasing Association, and some of those who financed the cost of their car are now worried about how they will keep up with the required repayments, when their financial circumstances change.

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When you find that you can no longer afford your car financing payments it’s stressful, but the first port of call if you anticipate problems should always be your financing provider.

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Timing is key – act early and speak to your financial services provider before you miss a payment. Don’t just stop making repayments as it may affect your credit score.

Your options depend on the type of funding you have

Rest assured you won’t be the first person to make this call. Most providers are used to helping customers overcome an affordability problem and will be happy to work with you to find an arrangement that works for both of you.

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Your options vary depending on what type of auto financing product you have contracted.

Refinance your car loan

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Auto loan refinancing is usually done by replacing your loan with a new one. You may be able to stretch out the new loan over a longer period of time, which may reduce the amount you have to pay each month, but may end up paying you more overall.

If you’re considering finding a new loan, check your contract terms, as some lenders will charge you a cancellation fee if you pay off your car loan earlier than agreed. Balance the prepayment penalty with the potential savings or lower monthly payments you expect from the new loan.

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The interest rate you pay depends on other factors such as: B. Your creditworthiness and recent changes in the Bank of England base rate. This could mean the interest you pay is higher than when you first took out your loan – make sure you shop around to see what interest rates are available to you.

Payment holidays for car financing

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Auto finance defaults have been common during the pandemic as an emergency measure to help people struggling during the lockdown. However, a lot has changed since then and not every provider offers them.

Talk to your provider first to see what your options are. Remember that even if they offer you a payment holiday, you must resume payments. If you choose to keep your agreement end date, your monthly payments will be higher to make up for the missed time.

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Alternatively, you may be able to extend your contract for an additional month or two. However, your payments may still increase as the car could decrease in value over the extra time and you are expected to cover this loss.

Terminate financing or leasing early

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If you have a hire-purchase or PCP contract, you have options where you don’t have to pay the rest of the contract. It is best to contact your financing provider and ask what options are available to you.

Please note that the options available to you may include returning the car to the financing provider, early termination fees or paying the final balloon payment. These additional charges coupled with additional mileage charges may mean that if you have exceeded the agreed mileage cap, you may end up paying more than originally agreed.

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Reaching an agreement with your financial provider may increase the amount of interest you end up paying overall, but make it easier for you to repay by reducing your monthly payments.

If you lease a car, you can return it without penalty in certain circumstances, depending on the agreement. That AA Smart Leasecontains, for example, an opt-out clause for certain life events such as dismissal for operational reasons, divorce or the dissolution of a registered civil partnership, the loss of a driver’s license for medical reasons or the death of the partner.

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Sell ​​your car or exchange parts

If you bought the car with an unsecured personal loan, you can resell it

If you bought your car with an unsecured personal loan provided by a finance company, then the vehicle is entirely yours. This means that you can always sell the car and use this money to pay off the remaining debt.

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It’s also possible to partially trade-in a car if you’ve completed a PCP or hire-purchase deal to get a cheaper vehicle and reduce your payments. You must receive both the settlement amount and the value of your car before calculating the difference. However, if you have negative equity on the loan, it can become an expensive swap.

Remember, the best thing you can do if you’re having trouble paying off your car loan is to contact your finance provider and discuss your options. It may also be advisable to seek independent financial advice.

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