Few things in life are as demoralizing as realizing you can’t pay all of your bills.
As the effects of the coronavirus pandemic pummelled the U.S. economy, mandatory business shutdowns and reductions in consumer demand led to massive job cuts and record unemployment claims. According to the U.S. Department of Labor, more than one in 10 Americans in February 2020’s workforce filed for unemployment in the last two weeks of March and the first week of April.
Tens of millions of Americans have filed unemployment claims since the pandemic struck in mid-March, according to statistics from the U.S. Department of Labor. The number of new claims each week is lower than the record highs seen in March and April, though the numbers are still some of the highest the agency has ever recorded.
Many car owners will find it hard to make their car payments and avoid defaulting on their car loans. Others may put off a car purchase or lease because of a tenuous job status that takes away confidence they’ll be able to make their payments on time.
What Should You Do if You Can’t Make Your Car Payment?
First, you don’t want to panic. Your second task is contacting your lender. While you may be afraid to contact your lender and tell them you’re out of work, many lenders are offering special forbearance programs to help borrowers get through the economic effects of the pandemic. If yours is not, there are still options available. Not doing anything or hiding your job loss from your lender is not a good strategy. Missing payments and potentially defaulting on your loan are problems that can haunt your credit for years after the crisis has passed.
“Consumers who expect to be impacted financially by coronavirus, should contact their credit union to discuss options,” says Lynn Heider, vice president of communications and public relations for the Northwest Credit Union Association. “Most credit unions have programs in place, allowing members to temporarily skip payments, obtain emergency low-interest loans, and lower interest credit cards.”
Most banks, credit unions, and other lenders don’t want to see you default on your loan or face repossession. It destroys customer relationships, it’s expensive, and it takes a lot of everyone’s time. Instead, they want to see you get back on your feet, make future payments, and eventually pay off the loan.
“When you repossess a car, it does nobody any good. We’re typically going to take a loss on it, and the member’s credit is going to be harmed by it,” says Joe Pendergast, vice president of Consumer Lending at Navy Federal Credit Union. “It’s not a win for anybody.”
We’ll look at some programs announced by major lenders, then discuss specific steps you can take if you’re in danger of missing a payment.
Special Programs from Lenders
Most banks, credit unions, and the lending arms of most automakers announced programs to both help current borrowers and give new borrowers peace of mind. Nearly every automaker’s financing arm announced first payment deferrals of between 90 and 120 days to buyers of new vehicles.
“We understand the concern and uncertainty people may be experiencing surrounding the coronavirus (COVID-19) and are committed to being responsive to the needs of our customers and associates as the situation evolves,” said a spokesperson for Capital One in an emailed response to questions. “We also understand that there may be instances where customers find themselves facing financial difficulties. Capital One is here to help, and we encourage customers who may be impacted to reach out so we can discuss and help find a solution.”
It’s important to note, however, that not all borrowers will qualify for forbearance on their current loan or a deferment on a new loan. Lenders will look at your credit score, assets, and other factors when deciding whether to extend the offers. Different lenders have varying credit requirements for extending payment relief and are flooded with requests. It’s critical borrowers don’t wait until the day their payments are due before contacting their lenders, as the approval process may take some time.
Many carmakers extended leases up to six months, and offered deferred lease payment programs. It’s essential to check with your leasing company to determine if the contract’s mileage cap will be lifted, or if you need to keep your mileage within the original limit. With excess mileage costs ranging from 15 to 50 cents per mile, the fees can add up quickly.
Ally Bank, a major auto lender, offered customers payment deferrals for up to 120 days. Interest will still accrue on the balance, but the lender won’t charge late fees. Ally is a financial partner to Mitsubishi, and their customers can contact Ally directly.
Fifth Third bank, a lender with operations in 10 states, offered up to a 90-day payment deferral on car loans. They, like many banks, also announced a suspension of any new repossession actions until the crisis passes. Key Bank is working with borrowers, providing up to a 90-day payment referral with no negative information reported to credit bureaus. USAA Bank has offered special payment assistance programs with payment extensions of up to 60 days.
Steps to Take if You Think You’re Going to Miss a Payment
If you have lost your job, had your hours reduced, or suffered a loss that makes it impossible to make your car payment, there are several steps you should follow before your payment is due.
Determine Your Loan-to-Value Ratio
It's crucial you know where you stand with your car's value and the balance of your loan. If you owe more than the car is worth, your options are limited. When your vehicle is worth more than your loan balance, there's a better chance you can deal with the issue and come out unscathed. Because of rapidly changing market conditions and volatile used car values, borrowers who had positive equity last month may be underwater on their loan today.
Talk to Your Lender
The time to talk to your lender is before you miss a payment. In this time of national crisis, many lenders have created special programs or are being more flexible when working with borrowers. There's an understanding in the marketplace that the effects on employment will likely be more temporary than long-term. Because of that, some lenders will allow borrowers to defer payments, have their payments reduced for a time, or their loan terms renegotiated. You may be able to refinance and significantly lower your interest rate or stretch the loan term to lower each monthly payment.
In most cases, you’ll want to talk to your lender by phone, email, or through the messaging system on the lender’s website. Banks, credit unions, and other lenders are facing a combination of massive call volumes and reduced staffing to maintain social distancing in their call centers. Phone hold time and email response times may be long, so you want to start trying to contact them long before you miss a payment.
Many banks and credit unions had to close branches, reduce open hours, and limit services in response to the pandemic. Capital One, for example, closed their Capital One Cafes and some other locations across their branch network. TD Bank reduced branch service hours at all branches and closed some locations. If you want to visit your lender in person, be sure to call or check their website to ensure that they are still open, wear a face mask, and follow social distancing guidelines during your visit.
Refinance Your Car Loan
If your current car loan has a high interest rate, you can potentially save a significant amount of money each month by refinancing your car loan. By lowering your interest rate, you can reduce the size of each monthly payment.
“We’ve seen our auto refinance volume double since the pandemic began,” says Pendergast. “That speaks volumes about how people are trying to lower their monthly payment obligations and trying to free up cash. A lot of it now is more of a need versus a desire.”
There are two major factors that make an auto loan refinance work. Either the loan interest rate needs to be substantially lower than it was when you took out the original loan, Pendergast says, or your credit score needs to have improved enough that lenders see you as less risky, and offer you a lower rate.
Find the Best Rate for You
Use Your Federal Stimulus Check
Most Americans have, or soon will have, a bit more money in their bank account, courtesy of the U.S. Government’s CARES Act. If you have sufficient funds to support critical payments, such as rent, utilities, and food, you might consider paying some of the stimulus money to keep your car loan current or ensure you’re not underwater on the loan. Protecting your credit now will pay huge benefits later, when you need another car loan, a mortgage, or a credit card.
Missing a Payment
Missing a payment date or two isn’t the end of the world with most lenders, as long as you talk to your bank or credit union and start paying again as soon as possible. Your credit may take a hit, but should recover over time. Once you miss a few payments, however, lenders may be less likely or able to work with you.
With some lenders, however, such as “Buy Here, Pay Here” dealerships, being even a day late on a payment can lead to your car being electronically disabled or repossessed.
Dip Into Your Savings
If the choice is to not make a car payment or tap into your savings or emergency fund to make it on time, using your savings might be the smart move. Of course, you’ll only want to do so if your savings will remain ample to cover unplanned expenses, such as car repairs, urgent home maintenance, or unexpected medical costs. It’s not a decision to make lightly, as every dollar you spend toward your car is a dollar that’s not available for other critical or emergency expenses.
If you are saving for a home, it’s a better idea to pull some cash out of your house fund and make your car payment than it is to miss an auto loan payment. The damage to your credit from missing a payment date could make borrowing for a mortgage more difficult and expensive. Better to have to put off your home purchase for a short time than pay extra on a mortgage for the next 15 to 30 years, or fail to qualify at all to a decline in your credit score.
Citi and some other financial institutions have waived some early withdrawal penalties on CDs. Taking advantage of the bank’s offer allows you to liquidate some cash and make your payments on time, with less of a financial downside than in normal times.
Sell Your Car
If your car is worth more than the balance of the loan, you can sell it and pay off the loan balance before you miss a payment. You can then use your positive equity to put toward a cheap used car. If your credit score is still high, you may be able to lease a vehicle with low monthly payments. If you choose this option, you should start the process of getting your car on the market as quickly as you can. It may take longer than normal to sell your car, get the title from your lender, and file the necessary paperwork with your state’s department of motor vehicles.
Our used car rankings and reviews can help you find a pre-owned vehicle that will give you years of low-cost service.
When you’re underwater on your car loan, meaning you owe more than it’s worth, you have to work harder to protect your credit. You can sell your car to a private party, maximizing how much you get for it, or you can do everything possible to continue making timely monthly payments. Our guide to getting out of an upside-down car loan offers more tips on protecting your finances when you’re trying to sell a car that’s underwater.
If you owe more on your car than it is worth, your lender can demand you make up the difference between the amount you sell it for and the balance of your loan. If the car is repossessed, voluntarily or otherwise, the lender can add the cost of repossessing and any auction fees to your loan balance.
Unfortunately, with stay-at-home orders still in force in some states and cities, your ability to sell your car may be limited in your area.
Work With a Credit Counselor
One of the first steps in getting out of debt is to stop digging the hole any deeper. A reputable credit counseling service – not a debt consolidation company – can help you set up a budget and work with creditors to create manageable payment plans. The Federal Trade Commission offers a guide to finding a credit counselor who will help you, and not rip you off.
Give the Car Back to the Lender
It’s human nature to want to protect your car from repossession, but it’s a bad idea to hide it from the bank. If you’ve missed several payments and know the lender is going to repossess your car, it’s much better to return it voluntarily than make them chase after it.
Here’s why: The lender pays a fee to the repossession company to retrieve the car. The harder you make it for them to get the car back, the more the repo company can charge. The fees the repo company charges the bank are added to the loan balance you’re responsible for. In other words, the games you play only end up costing you money.
Watch Out For Scammers
Unfortunately, some scammers use turbulent times to prey on vulnerable consumers. Watch out for deals that look too good to be true, such as credit repair services and offers to get you out of debt, for a price. The U.S. News Money team provides a guide to recognizing and preventing loan scams.
If someone contacts you online or by phone claiming to be your lender, it is critical you verify their identity before giving them any personal information.
Check Your Credit Reports
You can normally get a copy of your credit reports once a year from each of the country’s three major credit bureaus. Because of the pandemic, Equifax, TransUnion, and Experian are letting you access the reports weekly. It’s important to do so right now, especially if you’re missing payments on any of your obligations. Checking your credit reports can also tip you off to identity theft and other scams.
The only official place to get your free credit reports is AnnualCreditReport.com. Many other sites offer free reports, but many are just trying to trick you out of personal information or are trying to sell you expensive credit monitoring products.
Our Money team has put together a guide to checking your free weekly credit report.
Don’t Neglect Your Auto Insurance
When cash gets tight, it can be tempting to skip paying your car insurance premiums. That’s a risky and irresponsible thing to do. First, it could leave you open to serious financial liability – including and up to the loss of your home in some states. Second, it’s illegal in most states to drive without insurance. Lenders and leasing companies generally require you to carry insurance to protect their collateral in case of an accident or theft. If you don’t have insurance, your lender or leasing company can place their own insurance on the car – and charge you an exorbitant price to do so.
Fortunately, many auto insurance companies rolled out programs to assist customers affected by the COVID-19 pandemic. In fact, the majority of the companies in our ranking of insurance companies have programs to defer payments, skip late fees, and suspend policy cancellations. They encourage customers to use their online tools to reach representatives, as many agency offices are closed.
We’ve put together a guide to the coronavirus and car insurance that tells you what you need to know in today’s quickly changing conditions. Most auto insurance companies have provided rebates to customers because people aren’t driving as much.
Our auto insurance guide will help you find the cheapest insurance in your state, the coverages you need, and any money-saving discounts you qualify to receive.
Coronavirus Resources From U.S. News & World Report
- Coronavirus and Cars: What you need to know about car buying today
- Coronavirus and Car Insurance: Should You Make Changes to Your Auto Insurance Policy?
- Coronavirus and Car Deals: Can You Get a Good Deal on a Purchase or Lease?
It is the mission of U.S. News & World Report to help you through life’s major decisions and events. We’ve created a centralized hub of coronavirus information to help you and your family weather this storm. We have resources ranging from how to avoid being infected to understanding your rights as a traveler with canceled vacation plans. Our education team has resources to guide you through changing financial aid policies and how to move your education online.
The U.S. News Money team offers a wealth of information about navigating today's turbulent financial environment while helping you protect your savings and retirement.