How to Manage Auto Loan Debt (2022)
- Options like refinancing can help you pay less over the life of your car loan.
- Think about the debt management strategies that best suit your financial situation.
- It is important to stay on top of loan repayments to avoid the consequences of default.
Americans hold a total of $1.4 trillion in auto loans, according to Consumer Reports. This number has increased dramatically over the past decade, and many financial analysts believe we are paying too much of our auto loan debt. Although factors such as the rising cost of cars play a role in increasing car loan debt, many people face difficulties when they fail to anticipate the impact of buying a car. car on their personal finances.
A car loan is a big financial investment, but it doesn’t have to be stressful to manage. There are steps you can take to make sure your monthly payments are within your budget, from choosing a loan term that fits your financial needs to shopping around for the best interest rates for your situation.
However, external factors or changes in your personal circumstances can sometimes make it difficult to meet your financial obligations. Defaulting on a car loan can have serious consequences that impact your financial future, so it’s important to make sure you’re able to make your monthly payments. This guide offers strategies for managing your auto loan debt.
Refinance your car loan
Do you have the best auto loan rate for your situation? Interest rates change over time and vary based on personal factors, which means you may be able to refinance your loan at a better rate than you currently have. Even a single percentage point difference in an interest rate can have a significant impact on your overall loan amount.
If you get the best car refinance deals — with lower rates and better terms — over time, you might end up paying less in fees and interest. Whether average interest rates have dropped or you’ve recently taken steps to improve your credit score, refinancing can reduce what you pay over the life of your car loan.
Although refinancing is often a good financial strategy, there are pros and cons to consider before making a decision.
|Benefits of refinancing||Disadvantages of refinancing|
|Reduce your monthly payment||Additional costs associated with refinancing|
|Can choose a shorter or longer loan term, depending on your needs||Not an option for all borrowers|
|Tap into your car’s equity||Depends on average interest rates at time of refinancing|
Negotiate debt settlement
Many creditors will accept a lump sum payment in exchange for canceling some of the outstanding debt. This is called a debt settlement. The payment can usually cover between 10% and 50% of the debt, freeing up monthly funds to pay off other debts.
An American Fair Credit Council report on Consumers in Crisis claimed that, on average, debt settlement helps people save $2.64 for every $1 charge assessed. This is one of the most effective ways to reduce payments and manage debts. However, as with refinancing, there are certain risks that need to be considered.
To successfully negotiate debt settlement, you will likely need to stop making your minimum monthly payments before you begin negotiations or sign into a debt settlement program. According to analysts at Investopedia, people with delinquent debt often have more bargaining power than those who keep paying. However, when you stop making payments, your debt will increase and there is no guarantee that the settlement company will cover all of your costs. The Consumer Credit Bureau warns that accrued fees can wipe out any savings from debt relief programs.
Finally, keep in mind that debt settlement will negatively impact your credit score, regardless of your strategy or results. However, once you get your payments under control, you will see your credit score improve over time.
|Benefits of Debt Settlement||Disadvantages of Debt Settlement|
|Reduce your debt||Negative impact on your credit score|
|Frees up money to manage other debts||No guarantee that the settlement company will cover all costs|
|Can help avoid bankruptcy||The lender may not accept the debt settlement offer|
Set up automatic payment for monthly payments
Autopay can help people manage their debt by preventing it from accumulating in the first place. Together with your creditor or bank, you agree to a regular schedule and payments are automatically taken from your account. Especially for those with multiple loan or credit accounts beyond just their car loan, this can be a helpful way to meet all financial obligations without risking missed payment charges.
Although Autopay can be a reliable method to help manage debt, it may not be the best strategy for all borrowers. Autopay can backfire on those who don’t have enough funds in their account to cover their payments, which can result in additional fees and penalties. It can also become difficult to keep track of multiple auto-pay accounts, miscalculating the amount needed in your bank each week. There are many advantages to using Autopay as a financial strategy, as well as some disadvantages.
|Advantages of automatic payment||Disadvantages of automatic payment|
|Avoid missed payment fees||Possibility of overdraft fees with your bank|
|May receive a discount from some lenders||Tracking multiple autopay accounts can be difficult|
|You don’t have to remember to schedule payments|
Manage other types of debt to help you with your car loan
While each of these strategies can be helpful in managing your car loan debt, you may have other debts that impact your financial situation and your ability to repay your car loan. Consider some of these methods that deal with other debt accounts to improve your financial stability.
Repay revolving debt
Revolving debt is a way for people to profit from their purchases before they are fully paid off. Credit cards, borrowing from a line of credit, and pay-later options are all ways to rack up revolving debt, and they can easily slip away from you if you’re not careful.
Americans with revolving debt paid nearly $111 billion in interest and fees in 2021, according to research by the Brookings Institution. Revolving debt is easy to accumulate, so it’s important to create a strategy to manage it. Some strategies to consider include:
- Pay more than the minimum monthly payment
- Make payments to accounts with the highest interest rates first
- Avoid extra lines of credit whenever possible
- Take advantage of a 0% annual percentage rate (APR) on transfers
When your revolving debt is under control, the rest of your debt becomes more manageable, which helps you meet your car loans more easily.
Refinance other outstanding loans
Car loans aren’t the only types of debt that can be refinanced. You can manage your auto loan more effectively if you successfully manage your other debts as well. Two of the most common types of debt in America — mortgages and student loans — can be a good place to start.
Refinancing your mortgage can lower your monthly payments, allowing you to pay more on other debts, like your car loan. Mortgage refinancing works similar to refinancing a car loan and may be a good choice if average interest rates have dropped since you took out your original mortgage.
Refinance your student loans
The average student debt balance is $37,014, according to research compiled by EducationData.org. About 43.4 million people have federal student loan debt, making it difficult for many to take out other types of loans, such as car loans. Refinancing your student loans can give you better terms, which could make it easier for you to manage this and other debt.
An auto loan is a big financial undertaking, and managing your auto loan debt is key to ensuring your financial stability. Before taking out a car loan, consider your budget and other financial obligations to make sure you’re able to make your monthly payments for the full term of your loan agreement.
Whether you choose to refinance your auto loan or settle other debts you may have, these tips and strategies can help simplify your auto loan debt management. When you have a plan in place to manage your debt, you can enjoy your car stress-free while you pay off your loan.