What happens if I can’t pay my 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.

So, if you’re under financial strain due to the current cost-of-living crisis, you might be wondering, “What happens if I can’t pay my car loan?” Well, as you probably already know – worst case scenario, you could run the risk of having your car being repossessed. 

But don’t panic! There are usually a few different options available before it gets to this stage. Let’s take a look at some of them:

Calling up your lender to talk about your financial troubles might feel a bit uncomfortable – but it’s a lot more common than you’d think! Ultimately, 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 before making any rash decisions … like hiding your car in the garage (don’t do that). 

Here’s a checklist of questions to consider before making the call to make sure you’re covering all your bases:

• How much do I owe? It’s very important to know exactly how much you owe on your car loan repayments so you can make a proper assessment of whether you can realistically pay it back.

• 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. Say you owe your car loan lender $7,000 and a car dealer offers you $10,000 for your vehicle – if you accept the offer, the dealer will buy your car, and 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 check if you’re 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. With secured loans, you must provide an asset (your car) as a guarantee for the loan. This means your car can be seized by your lender if you don’t make your repayments. But don’t worry, if you have a personal loan, you should get 30 days to pay back what you owe before the car is taken. On the other hand, if you’ve got an unsecured loan, there is no asset on your loan, so your car cannot be seized by your lender without a court order. Alternatively, you can 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. By law, your lender must reasonably consider your request - if they agree, make sure to 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.

Refinancing may be the better option for you to reduce your monthly car loan repayments. While you may have the option to refinance with your current lender, it may actually 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, which means you’ll completely pay that loan off. You’ll then enter a new loan agreement with your new lender and will be required to make regular repayments on this loan. The account you held with your old lender should be closed once the balance has been settled.  

Example scenario:

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

However, if you refinanced your vehicle with a new loan at an interest rate of 7.00% p.a., 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 can extend the length of the loan altogether or cost you more in fees. Increasing the time that you pay back your car loan means that you could pay more in interest at the end of the 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.

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

If you decide to sell your car privately, you will have a couple of disclosure obligations to both the buyer and your current lender. Firstly, 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 its condition at the time of hand-over and research its value 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

1. Sort your budget: Get your finances in order and get a clear idea of how much you can realistically afford before taking out a car loan. Stick to this framework and ensure the car you purchase is within your means so you don’t get stuck in a situation where you can’t pay.  
2. Do your research: Comparing dealer finance and car loan lenders could be the difference between getting a great deal and getting 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 might manage to lock in a reasonable rate for the duration of your loan. This means your repayment amount will stay the same each month. Knowing exactly how much you need to pay every month can help make budgeting easier. Variable rates tend to be cheaper but can fluctuate over time. Go for the option that better suits your financial situation.
4. Extra payments: You may have more money one month vs the next, so the ability to make extra payments is a handy feature to have in case you want to pay it off a little quicker.
5. Be mindful of fees: Choosing a car loan with minimal fees can save you unnecessary costs, giving you more cash to help you make your monthly payments. It’s unlikely to find a loan that’s 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 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.