One of our readers, Maggie, had this question for us:

I am finding myself unable to keep paying my car which is a considerably high monthly payment. When I took the loan, I was earning more money than now, but since it is happening more and more everywhere, my income has been drastically reduce, so it is paying my house or paying my car and I’d rather walk.

How does this affect my credit score? I know it is good at the moment since I have been struggling to keep payments on time, but it is not longer a reality.
Thanks

Thanks for your question Maggie. I am sorry to hear that you are in this position, but you do still have options – especially since your credit is good right now.

The best advice I can give you is to protect your credit rating at all cost. If you allow non-payment of your car loan to show up on your credit report, with an eventual repossession it is going to ruin your credit. One or two late payments, and your credit score can recover. But if you have non-payments and a repossession on your credit score, it will take you four or 5 years (at a minimum) to recover your credit score from that. You knew that though – it’s why you asked, right? So what to do about it!

The first thing you will want to do if you know you can no longer afford to make your payments, is to call the bank that loaned you money for your car. Tell them you are having trouble making your payments, and ask them if they can help you.

There may be nothing they can do, but if you are pro-active about it, you may be able to have the interest on your loan reduced, your payments temporarily suspended or reduced, or any number of other things. Any time you fall behind on your bills – any bills whether it’s a credit card, house payment, or car payment – the best thing you can do is to call your lender as quickly as possible.

Most lenders have programs and procedures for people who need to pay late or make different arrangements. Just be sure you check out your options first because this will help you protect your credit rating. If things do go badly for you with this loan, at least take every step you can to minimize the damage. That way the next time you need to get loan you will still qualify for good terms, and you won’t have to pay higher than normal interest rates over the next five years.

Here’s another option if your lender can’t help you – sell your car as quickly as possible. Do not sell it to a dealership because you won’t get as much money for it. List your car for sale in your local paper, and on Craig’s List. It is likely that you will not get as much money for your car as it is worth, or enough to fully pay off your loan – but it will allow you to pay off a chunk of what you owe.

Since your credit is good, you can always consider getting a bank loan for the rest of the amount that you owe on the car, and make smaller payments on the debt that remains.

If you have excellent credit you could also consider putting a portion of your auto loan onto a credit card. Just make sure that it’s a zero percent interest credit card, or a low interest credit card. That would give you a little more time to pay off your car loan.

As far as not having a car after that, I would check Craig’s List for a used one as well. Something that you can buy outright with no payments, even if it’s not a very nice car. Just something to get you through.

As a last thought – consider grabbing temporary second job (I don’t know your situation, so I don’t know if this is possible for you). But if you can, it might be enough to tide you over for a while and get you caught up on your payments.

Thanks again for your question Maggie, I hope this helps. If not, leave me a comment below and I will do my best to address any other concern you have.

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This entry was posted on Tuesday, December 16th, 2008 at 15:43 and is filed under Bankruptcy FAQ, Debt Reduction FAQ. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.