First Person: Smart Moves for a Lower Car Payment

When you are self-employed, as I have been for years, an unexpected downward trend in your area of business can seriously affect your income. After your mortgage, your car payment is typically the largest monthly bill you face, and you may be tempted to skip one or two payments when your financial situation is in flux. But in an unstable economy this may take longer than you think, while missing payments on your car loan or lease may put you in default within a relatively short time, depending on the terms of your contract. Your car will then be repossessed by the lender, while your credit score will plummet faster than a ski jumper.

Instead, consider these options for reducing your car payment the smart way.

Contact Your Lender

Remember that you signed a contract with a lender when you leased or took a loan on your car. If you can't uphold your end of the bargain, contact the lender at once with a Financial Hardship Letter that specifies the reasons for your difficulties and how long you expect to be unable to make your car payments. If nothing else, this will buy you time before the car is repossessed.

Return Your Car to the Bank

If you decide to simply mail your car keys to the bank with an address for where they can find the vehicle, several things will happen. You will be found in default of the terms of the loan or lease, which will severely harm your credit score. The car will be repossessed and all associated fees will be added to the loan. The bank will sell the car at auction, and the value fetched will be deducted from the outstanding loan balance. But in the end, the one left holding the bag filled with the unpaid balance will be you, whether you are there or not. The bank can then initiate debt collection proceedings against you.

Refinance Your Car Lease

If you have leased your car, there is very little you can do to mitigate the agreement. Banks no longer offer refinancing of car leases in order to extend the lease term or reduce the interest rate and car payment. Your only option is to apply for a personal loan (if you have good credit) with which to pay off your lease. However, be sure that the new loan interest will be sufficiently lower than that on your current lease, and that the length of the loan will reduce your monthly payments to a point where you can afford them.

Refinance Your Car Loan

If interest rates have dropped since you bought your car, or if your credit score has risen to the point where you will be offered better interest rate loans with longer terms, you can apply for a refinance loan with your bank or credit union. A longer term loan will allow you to reduce your car payment the smart way, but it will also increase the overall amount you pay for your car in the end, since you'll be paying interest for a longer period of time.

Pay off Your Car and Buy A Cheaper One

If you are close to the end of your car loan term, consider taking a small credit card loan to pay off your car. As soon as the title is released to you by the lender, you can advertise the car for sale in local newspapers and venues like Auto Trader. After the sale, you can buy a cheaper car. If you are married and your spouse has better credit, buying the car under her name will further reduce your new car payment.

Trade in Your Car for a Cheaper One

You can trade in your expensive car for a cheaper one at a car dealership. In this case several things will happen. A trade in value will be assessed for your car (which is lower than a private sale value). If you are only half way through your expensive car loan or are upside down on your current loan, which means that you will owe more than the vehicle is worth, the dealership may be able to slip the difference between the trade-in value and the loan payoff amount into the new loan for your cheaper car. But if the difference is too great, you will need to make a down payment that will buy out the remaining balance on your previous upside down loan (or lease).

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