Monday, November 16, 2009

In default on car loan: What to do?

Negotiating with the lender face-to-face might help

By Todd Ossenfort

The Credit Guy
'The Credit Guy,' columnist Todd Ossenfort
The Credit Guy, Todd Ossenfort, is a credit expert and answers readers' questions about credit, counseling and debt issues.

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Question for the expert

Dear Credit Guy,
I lost my job and my wife just got one in June. We're behind on one car and the lender wants $1,000. We have another car through the same finance company, and they said if we default on one car they would take both. Can they do that? Also, would they put the money at the end of the loan for us because we can make both payments but we can't pay the $1,000? -- Paul

Answer for the expert

Dear Paul,
I'm not sure exactly what your lender can or cannot do concerning your loan because I haven't read your loan papers. I recommend you track down the loan agreement and review the section that covers how a default is handled. Unless it is included in the agreement, I don't believe your lender can repossess your other vehicle unless it is also in default.

Once you know what is included in your loan agreement, make an appointment to speak with your lender. If possible, I'd request a meeting in person. Typically your vehicle cannot be repossessed until after the loan is more than 90 days late, so be sure you act before you reach that point.

Be prepared to demonstrate that you are now able to make the payments on both of your vehicles. Regardless of what is included in the loan agreement, most lenders would much rather you make your loan payments so they can earn the interest charged on the loan rather than deal with the costs of repossessing the vehicle. So, keeping that in mind, be prepared to negotiate how you will pay the past due amount of $1,000.

Adding the past due amount to the end of the loan may require a modification of the loan into a new loan agreement, and I would be willing to bet your lender may be hesitant to do that. In addition, it may not be in your best interest to do so, especially if the new terms will increase your monthly payment. However, if your current agreement can be extended by the number of months it would take to pay the $1,000 without changing any other terms in the agreement, then that would be a very reasonable solution.

Another alternative is to request that you pay off the past due amount over an extended period of time by adding an agreed upon amount to your existing monthly payment until the past due amount is paid in full. For example, if the lender agreed to allow you four months to pay off the $1,000, you would need to add $250 to your existing monthly payment. Assuming you could afford to make the additional payment, your lender may be willing to allow you to pay what you owe in this manner. Regardless of how the negotiations are resolved, request that the solution you decide upon be put in writing.

Moving forward, you might consider purchasing loan payment protection insurance that would provide money for your car loan payment should you be unable to so due to unemployment, death or disability. The insurance can be expensive, especially if added to your loan with the auto dealer. It is best to seek this type of insurance from an independent agent if you are interested. I'd review the affordability of the insurance with your current insurance agent at the time of your next car purchase.

Of course, if you buy a new car in the near future, many manufacturers are offering free payment protection as incentives to buy. However, I wouldn't recommend buying a new vehicle until you are once again gainfully employed and are able to put down a significant down payment.

Take care of your credit!