Here's What Happens When You Don't Pay Your Auto Loan

Contact your lender ASAP.

As grocery, insurance, and utility bills have gotten more expensive due to inflation, you might find yourself unable to comfortably afford your auto loan payments. This is a bad situation to be in, as missing payments can lead to credit score damage and even the loss of your car through repossession. Here's how to get out of this situation and get back on track with your auto loan -- and avoid tanking your finances.

Your lender can help

While it may be tempting to ignore the problem, the best way to handle an inability to cover your car bill is to face it head on. Your first step should be to get in touch with your lender, as you do have options here. Car payments have gotten more expensive overall, and chances are, your lender has heard similar tales of woe from other borrowers -- so don't be embarrassed.

Defer your payments

If this is just a temporary setback (say, you had an unexpected bill that you had to pay, thereby leaving you without money to cover the auto loan this month), your lender may be willing to let you defer a payment. Not every lender allows this, and you may have to write a hardship letter explaining why you need to skip a payment or two. You might also have to pay a small fee, and the missed payments will be added to your loan balance to be paid down the line -- meaning you'll earn interest on them, of course.

Refinance your loan

If you're having a more serious and sustained cash flow problem, you'll need to explore other options. Refinancing your loan could be a possibility; if you got stuck with a higher interest rate on your loan when you got the car and have taken steps to improve your credit, you might be able to swap your loan for one with a lower interest rate. You might also be able to stretch the length of your loan period, resulting in lower payments that you can more easily afford.

Get rid of the car

If you cannot afford to pay for the car at all, though, the best course of action will be to give it up. This could mean trading it in for something less expensive, selling it outright (and hoping you get enough to pay it off), or letting the lender take it back.

While there is no difference for your finances whether you voluntarily surrender the car or your lender employs a repossessor to take it back, one of these is arguably far more traumatic than the other. Your lender will sell the car to recoup its costs, and if money is still owed after the sale, you'll have to pay it or risk having it turned over to a collections agency. You definitely don't want to deal with the resulting damage to your credit.

Be careful with your auto loan

I hope you never find yourself in this situation, and luckily, there are a few steps you can take to ensure it doesn't happen to you.

• Consider your total financial picture if you're buying a car: Many of us require a car to live our daily lives, but it's not an insignificant expense to purchase, insure, and maintain one. So make sure you consider your entire budget and potential range of expenses before signing on the dotted line for a car loan.
• Keeping a well-running paid-off car is a good move: If you can maintain a car after you've paid it off, it's a win for your finances. Older cars may be cheaper to insure, too.
• Build up an emergency fund: Having an emergency fund with several months' worth of expenses ready to go is a solid money move no matter what. If you can manage to save one up and keep it available in a high-yield savings account or money market account, you'll sleep better at night and perhaps avoid a scramble to pay bills should you have an unexpected expense.

If you're encountering financial difficulties and your car loan is at stake, don't delay. Get in touch with your lender and see what you can do to solve the problem.