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What to Do If Your Car Loan Outlasts Your Car

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What happens if your car loan lasts longer than your car? While you may have every intention of driving a car long after it’s paid off, an accident (and inadequate insurance), expensive repairs, or mysterious problems your mechanic can’t fix could leave you with a vehicle that’s out of commission even though you’re still making payments. 

“Longer-term loans are increasingly prevalent,” says Melinda Zabritski, senior director of automotive credit with Experian. Nearly half (48.2%) of model year 2014 vehicles purchased used were financed with loans of between 61 and 72 months, according to Experian Automotive data. 

What can you do if you find yourself in this position? Here are four possible options.

1. Pay Off the Debt 

Of course, paying off the balance of your loan would be your best option, but what if you don’t have that kind of cash sitting around? Or what if you need those funds for a down payment on another vehicle? In that case you may have to use another loan to pay off the car loan so that you can get the title and dispose of the vehicle. One option might be a 0% or low-rate credit card balance transfer offer. In many cases, you can have those funds deposited into your bank account and use them for whatever debt you want to pay off. Make sure you understand the fees that will be charged (usually 2% to 4% of the amount transferred) and that you can pay the debt off before the low-rate offer ends. (You can find Credit.com’s picks for the best balance transfer credit cards in America here.)  

2. Roll It Into a New Loan 

An auto dealer may work with you to roll the balance of your loan on your current vehicle into a new loan. Technically “you can’t roll negative equity into a loan,” says Bob Harwood, vice president at CarLoan.com. but there are ways around it. A dealer can try to inflate the value of the trade-in and/or loan more than the value of the car. “Banks will put a cap on how much over value on a car (you can borrow),” he says. “It’s usually around 120% to125% if you have decent credit.” But with less than stellar credit, they may lend only 100% to 110% of value of the new vehicle — or even less if you have very poor credit. (It’s a good idea to know where your credit stands before applying for a car loan. You can get a free credit report summary, updated monthly, at Credit.com.) 

And, yes, they will want your old vehicle even if it’s now a junker, says Harwood, if only to try to increase the value of the trade-in to make the deal work. 

3. Park & Pay 

You could simply park the vehicle and continue to pay off the loan. When it’s paid off, you can then get the title back and donate it to charity, sell it, or use it as a trade in on another vehicle. 

But be careful: This strategy assumes you have a place to safely store it. And you may need to keep tags and/or a minimum level of insurance on the vehicle. Your homeowner’s insurer (or your landlord’s), for example, may not look kindly on an inoperable untagged vehicle sitting on blocks in your driveway. Or your city may require these types of vehicles to be garaged. Check with your insurance company, your DMV and city or municipality to find out what’s permissible.

4. Call a Bankruptcy Attorney 

You may be able to use bankruptcy to get out of this mess. “Bankruptcy can be a ticket out of this type of situation,” says Atlanta bankruptcy attorney Jonathan Ginsberg.  “If you qualify for a Chapter 7 you can surrender the vehicle and cancel the installment contract and owe nothing,” he explains. What if you don’t qualify? You may look into Chapter 13, which Ginsberg says may offer several outs: “’Cram down’ the loan to the value of the vehicle, ‘redeem’ the vehicle for the fair market value, or surrender the car and pay any deficiency at pennies on the dollar.”

More on Auto Loans:

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  • heavyw8t

    This is exactly what happened to me in 2013 after an accident. The other driver was not insured and I did not have collision. (I do now!) I had no recourse but to pay the $9089 balance. Whether I was hit by an another car or not, and it was not my fault – he crossed a median – I still agreed to pay them X number of dollars when I took on the loan. They may settle for a lesser amount, less than even the payoff amount, but I wouldn’t count on that. I was able to pay it off in a lump sum due to a totally unrelated windfall that happened just after the loan went 90 days past due, so I was extremely fortunate. The only thing to NOT do is just ignore it like it will go away. That is never a good strategy for ANY loan.

  • David Moakler

    Can I add two other possibilities?
    1) if you had repeated repairs, you may have owned a “lemon. In this case, there are procedures to follow which may result in the manufacturer reimbursing you. Google “Lemon Law” in your state for the appropriate steps to take.

    2) If there is no working car to repossess, the lender may consider their collateral unrecoverable, essentially making your remaining debt “unsecured”. If you convince them that this is the case, they may be accepting of an offer below the balance as a payoff.

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