What would happen if you defaulted on your auto loan?
When you opt to finance your brand-new car, you assume that you’re financially capable of paying the monthly amortization, especially if you have a steady monthly income. However, there are some instances that you might experience financial difficulties as a result of uncontrollable circumstances such as the covid-19 pandemic.
Car loan payment trouble
We all know that the covid-19 pandemic has been striking our economy since December 2019, forcing businesses to reduce their workforces or, in the worst-case scenario, shut down operations due to lockdowns and quarantine restrictions. When the pandemic hit, car owners were among the most affected, as their payments were halted. Even though the economy is slowly getting back to normal, many of them are still having trouble repaying their auto loans, and others have already defaulted.
Once you miss payments on your auto loan, expect your creditor to charge you late fees. Furthermore, your creditor will likely charge you interest (normally 5%) on the overdue amount that has accumulated. It can also impair your credit history, making it more difficult for you to secure loans in the future, even if they are unrelated to car purchases. Though creditors do not automatically repossess your vehicle after missing one payment, or even after the three (3) month grace period (which varies by creditors), you still have a chance to avoid having your vehicle repossessed.
What options do you have to save your car from being repossessed?
Car loan restructure
As previously mentioned, you still have options to save your car from being repossessed by your lender, including:
- Make up for payments that were missed. If you can still catch up on missed payments, it is better to review the loan contract you signed. Loan terms may vary between banks and other financing companies, some consider default if you missed payment by just one day while others provide you a longer grace period.
Car loan refinancing. In a car loan restructuring or debt restructuring per se, you must negotiate with your bank to modify the terms of your auto loan in order to reduce the burden of repayment, provided that you promise to be able to repay the auto loan after restructuring. This could involve modifying your payment schedule, offering you a longer grace period, or even adjusting your interest rates.
- Trade in your car at the dealership. Consider trading in your car for a cheaper model if you’re still able to make payments but with a reduced monthly amortization. In this way, the value of your car (after deducting depreciation) will offset the value of the cheaper model. While the more affordable model you choose may result in lower subsequent payments, the negative equity created by your old loan being applied to the new loan may result in higher payments. It depends on what you and the dealer can agree on.
Assume balance or “pasalo”. This option requires you to find someone willing to take on the responsibility of repaying the auto loan balance in exchange for money, with the goal of recovering a portion of the loan payments. It's the same as selling a car that hasn't been fully paid for. You can list your car online through a dealer, auction, or classified car website such as PhilVex.
Assume balance or pasalo
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