Car financing makes vehicle ownership more affordable for many drivers. If the monthly payments fit within your budget, financing can be an excellent option.
However, this does not imply that monthly auto payments are always inexpensive. If your monthly payment is excessive, you may find yourself in a difficult position.
You have several options if you cannot afford your auto loan payment, including trading in your current vehicle for a cheaper one.
What Happens if Your Car Payment Is Unaffordable?
Several problems could occur if you cannot afford your automobile payments.
You may have neglected one or two payments and received a delinquency notice from your lender. In this instance, you might be able to catch up with minimal penalties.
However, if you have missed multiple payments, the situation is typically more severe. At this juncture, your lender may assume that you have defaulted on the loan, meaning that you have ceased making payments entirely.
When you have an auto loan, the lender notifies the credit bureaus of any delayed payments. As payment history is one of the factors that determine your credit score, missing multiple loan payments can substantially lower your credit score.
If you cannot make your car payments and renege on the loan, the lender will repossess your vehicle. This allows them to sell the vehicle and recover the debt.
Trading in Your Car for a Less Expensive Model
If you are having difficulty making your auto loan payments, it is best to take action before you experience delinquency or loan default. Trading in your current vehicle for a less expensive one is one of the most effective methods to reduce your monthly car payment.
The procedure of trading in a vehicle is relatively straightforward. Following are the actions you should take:
Request an Exchange Value
The initial step is to visit a dealer and obtain a trade-in estimate. Several factors will be considered by the vendor when calculating your offer, including:
The automobile’s type and model
The automobile’s mileage
How long you have possessed the automobile.
The condition of the vehicle and whether it has been damaged
Establish a Budget
Before you begin browsing for new automobiles, you should establish a budget. Otherwise, you may find yourself in the same situation once more. Determine how much you can afford to pay each month in order to establish a suitable price range based on your desired loan term and estimated interest rate.
Shop for New Automobiles
After receiving the trade-in offer and determining your budget, you can begin your search for new vehicles. If you’re in the market for an inexpensive vehicle, you should also consider the vehicle’s ownership costs.
For instance, investigate the average cost of maintenance and restorations for the automobiles of interest. You may also obtain an auto insurance quote to determine the cost of insuring specific vehicles.
Utilize Your Trade-In Credit to Acquire a New Vehicle
After locating a suitable vehicle, you will be able to use the trade-in value as a credit toward the purchase price.
If your trade-in credit is $6,000 and the cost of your new vehicle is $15,000, you would only be required to pay $9,000 (plus taxes and fees). You can also speak with the dealership about obtaining another loan to finance the purchase of the new automobile.
Trading in a Leased Automobile
Positivity in equity is advantageous if you wish to trade in your financed vehicle for a reduced one.
When trading in a vehicle with equity, the vendor will pay off the remaining loan balance and deduct the equity from the price of the less expensive vehicle. The dealer will write you a check for the difference if the value of your trade-in exceeds the price of the vehicle you are trading for.
Conversely, if you owe more than the vehicle is worth, you have negative equity. Negative equity makes it more difficult (and more costly) to trade in a financed automobile for a less expensive vehicle.
If your vehicle has negative equity, you can either pay the difference out of pocket or ask the dealer to transfer it into a new loan. However, if you have an excessive amount of negative equity, a loan may not be the best option. Your monthly payment will be significantly higher, which may undermine the purpose of trading in your current vehicle.
Considerations Prior to Purchasing a Cheaper Car
When you are struggling to make your car payments, it may seem like a good idea to trade in your current vehicle for a lesser model. However, there are a few factors to consider prior to choosing this option.
Determine whether you need a car in the first place. If you have access to public transportation or can borrow a vehicle from an acquaintance or relative, you may be better off without a car. You will not be responsible for car-related expenses, such as maintenance, parking, or insurance.
If you must purchase a vehicle, choose a model that makes sense for you. For example, if you are on a limited budget, you should avoid purchasing a very old used car that will require frequent repairs. When purchasing a cheaper vehicle, you should also factor in the cost of petrol and insurance.
Most importantly, always keep your budget in mind when shopping. Choosing a less expensive vehicle does not have to be a permanent solution, but it can help you regain financial stability.
Leave a Reply