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

*If you’re experiencing financial hardship, It may be worth speaking a service like the National Debt Helpline

For many Aussies, access to a car is essential. But the thought of not being able to pay off a car loan can be pretty stressful.

So, if the current cost-of-living crisis has put you under financial strain, you might be wondering: “What happens if I can’t pay my car loan?” 

Worst case scenario, you could run the risk of having your car being repossessed. However, there are a few different options available before it gets to that bad. Let’s take a look at some of them:

Talking to your lender about financial troubles might feel a bit uncomfortable, but it’s a lot more common than you’d think. That’s because it’s in the lender's interest to find a way to help you pay.

With this in mind, there are a few things that you should find out from your lender:

• How much do I owe? Knowing what you owe on your car loan repayments helps when making a proper assessment.

• Do I have positive equity on my car? ‘Positive equity’ refers to the rare instance in which your car is worth more than the amount you owe on your car loan. For example, if you owe $7,000 but your car is worth $10,000, you could sell it, pay off the loan, and keep the $3,000 difference – all without affecting your credit score
• Can my lender repossess my vehicle? This depends on your loan type. With a secured loan, your car serves as collateral and can be seized if you default on payments, though you usually get 30 days' notice. With an unsecured loan, your car can't be taken without a court order. While you can voluntarily surrender your vehicle, be aware this will impact your credit score.
• Do I have the option to make a new payment arrangement? Contact your lender's financial hardship department to negotiate an affordable payment plan. Lenders must consider reasonable requests by law. Make sure to get any agreement in writing. If your request is declined, you can apply for an External Dispute Resolution and lodge a complaint

Another option you can take is to refinance your loan. You may have to refinance with your current lender, but it could be more cost-effective to switch lenders 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 initial loan. You’ll then enter a new loan agreement with the lender you refinanced with and will be required to make regular repayments. The account you held with your old lender should be closed once the balance has been settled.  

Example scenario:

According to the Mozo car loan repayment calculator, a $20,000 car loan over 5 years at 9.00% p.a. requires $415 monthly repayments, totaling $4,910 in interest. Refinancing at 7.00% p.a. would reduce this to $396 monthly and $3,761 in interest, saving about $20 monthly and $1,149 overall. 

While refinancing can make monthly payments more manageable, be aware it may extend your loan term. Those with good credit scores who've met previous loan repayments may qualify for lower interest rates.

While you may love your current set of wheels, you might be in a position where selling or trading it in could be your only option if you can’t afford to pay your loan. If you can make other arrangements for everyday travel, like public transport or downsizing your vehicle, you could save a lot of money.

Here’s when you might consider selling your car:

• You are certain that you can no longer make your repayments on your car loan
• You don't use your car every day - 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

When selling privately, you need permission from your lender and must inform the buyer about the existing finance. After agreeing on a price, arrange lender repayment and settle any remaining balance. Alternatively, you can let the lender sell the car - document its condition with photos and research its value beforehand. In both cases, you're responsible for paying any outstanding balance after the sale.

RELATED: How to sell a car with an outstanding loan

1. Sort your budget: Determine how much you can realistically afford before getting a car loan. Stick to your budget to avoid payment difficulties.
2. Do your research: Compare dealer finance and car loan lenders to get the best deal. Know what you want before visiting the dealership to stay within budget.
3. Choose the right rate type: Fixed rates keep monthly payments consistent and help with budgeting. Variable rates are often cheaper but can change over time. Choose based on your financial situation.
4. Extra payments: Look for loans that allow additional payments when you have extra funds to pay off your loan faster.
5. Be mindful of fees: Compare providers to find loans with minimal fees, giving you more money for monthly payments. While completely fee-free loans are rare, look for the most cost-effective option for your needs.

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