The COVID-19 pandemic has wreaked unprecedented havoc on the finances and well-being of people all over the world. In the United States, the tremendous impact on the economy has left many unemployed, scrambling to meet their expenses or find new income, and wondering how they’re going to make ends meet.
With Americans struggling to meet even their rent and mortgage payments, what about that auto loan? Even under quarantine, going without transportation isn’t a workable option for many. Here are some strategies for saving some money on your auto loan until things start to turn around.
What Help is Available?
The CARES Act, which passed in March of 2020, provided some much-needed relief to struggling Americans by disbursing stimulus checks, providing extended unemployment benefits, and giving many homeowners a chance to temporarily skip mortgage payments. The HEROES Act, which passed in May of 2020, promised more economic protections, unemployment benefits, and additional stimulus money, though it’s currently unclear when that money will reach those who need it.
Unfortunately, auto loans are not federally backed the way most mortgages are, which means there’s no direct help available from either of these acts when it comes to auto loans. However, many lenders are actively working with borrowers to help those who are struggling financially.
What to Do First
If the coronavirus pandemic has adversely affected your income or financial situation, the most important thing to remember is not to panic. You probably have more options than you think.
- Don’t ignore the problem. If you’re getting notices from your auto lender in the mail or falling behind on payments, now is the time to act. Late fees, finance charges, and impending repossession won’t do anything to ease your anxiety or improve your financial situation.
- Contact your lender. It’s important to remember that your lender doesn’t want to repossess your car any more than you want to have it repossessed. They’d much rather work with you on a solution than see you default on your loan — so get in touch with your lender as soon as you can and find out what can be done. You won’t be sorry.
Refinancing is when your current auto loan is replaced by a new one with altered terms. This is a common scenario during financial hardship, though it also sensible when your credit score has improved or the market has changed.
The most common benefits of auto loan refinancing are:
- A lower monthly payment, due to either a longer term loan, a lower interest rate, or both.
- A longer loan term, which means a smaller monthly payment with more interest paid over time.
- A shorter loan term, which means higher monthly payments but less interest paid over time (not the most common solution for those struggling financially).
- A reduced interest rate, which means less total interest paid over the life of the loan.
You can talk to your lender about what’s right for you. You can also use an online auto loan calculator to run some numbers and find out what refinancing could mean for your budget.
An auto loan modification differs from refinancing in that the terms of the existing loan are changed, rather than the existing loan being replaced by a new one. Loan modifications are often a last measure for borrowers who can’t make their monthly payments and want to avoid repossession.
In most cases, you will have to write a hardship letter explaining your financial situation to your lender. You will also likely need to provide documents proving your hardship, such as bank statements, pay stubs, or utility bills. Talk to your lender to find out exactly what will be required of you.
You should also be wary of loan modification scams from companies that prey on the desperate. It’s best to work directly with your lender instead of through an intermediary.
Remember: your lender will lose money on a repossession, so it’s in their best interest to work with you.
There are more money-saving steps you can take in addition to refinancing or loan modification, including:
- Switching insurance. If you’re having a hard time making ends meet, now might be the time to get a quote on some new car insurance and try to save money that way.
- If time and resources allow, it may be sensible to sell your car and trade it in for a less expensive model, or, if you have a second car, pare down to one and put the money to good use elsewhere.
The COVID-19 pandemic has made life more challenging for us all. It may seem difficult or impossible to make ends meet, especially when it comes to your auto loan. But it’s important not to bury your head in the sand and hope the problem will go away by itself. Act now and take control of your financial situation.