For many drivers, financing a car makes vehicle ownership more affordable. As long as monthly payments work for your budget, financing can be a great option.
However, that doesn’t mean monthly car payments are always cheap. If your monthly payment is too high, you may find yourself in a difficult situation.
If you can’t afford your auto loan payments, you have a few options, including trading in your current vehicle for a cheaper one.
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What if you can’t pay off your car?
If you can’t afford your car payment, a few things could happen.
Maybe you’ve missed a payment or two and received a notice from your lender that you’re in arrears. In this case, you may only be able to catch up with minor penalties.
However, if you’ve missed several payments, it’s usually a more serious matter. At this point, your lender may assume you’ve defaulted on the loan, meaning you’ve stopped making payments entirely.
When you have an auto loan, the lender reports your missed payments to the credit bureaus. Since payment history is one of the factors that influence your credit score, missing several loan payments can cause your credit score to drop significantly.
If you can’t afford your car payments and default on the loan, your lender will repossess your vehicle. This allows them to sell the car and recover the money owed.
Trade in your car for a cheaper one
If you’re having trouble making your car payments, it’s best to act before you run into late or default on your loan. One of the most effective ways to get a cheaper car payment is to trade in your current vehicle for a less expensive one.
The process of trading in your vehicle is quite simple. Here are the steps you need to follow:
Request a value change
The first step is to visit a dealer and get a trade-in offer. The dealer will take a few factors into account when calculating your offer, including:
- Make and model of the vehicle
- The mileage of the vehicle
- How long have you had the vehicle?
- Condition of the vehicle and whether it has any damage
Create a budget
Before you start shopping for new vehicles, it’s a good idea to set a budget. Otherwise, you could find yourself in the same situation again. Find out how much you can reasonably afford to pay each month to establish an appropriate price range based on your preferred loan term and estimated interest rate.
Buy new vehicles
Once you’ve received your trade-in offer and set your budget, you can start shopping for new vehicles. If you’re looking for a cheaper car, be sure to factor in ownership costs in addition to the vehicle’s sticker price.
For example, do some research on the average cost to maintain and repair the cars you’re interested in. You can also get an auto insurance quote to see how much it will cost to insure a specific vehicle.
Use your trade-in credit to buy a new car
Once you’ve found a suitable car, you can purchase the vehicle using the trade-in value as a credit towards the cost.
For example, if your trade-in credit is $6,000 and your new car costs $15,000, you’ll only have to pay $9,000 (plus taxes and fees). You can also talk to the dealer about getting another loan to finance your new car purchase.
Trading in a financed vehicle
If you want to trade in your financed vehicle for a cheaper one, it helps to have positive equity.
When you trade in a car you have equity in, the dealer will pay off the remainder of the loan and subtract the equity from the price of the less expensive car. If your trade-in equity exceeds the price of the car you’re trading in, the dealer will cut you a check for the difference.
On the other hand, if you owe more than the car is worth, that means you have negative equity. Having negative equity makes it harder (and more expensive) to trade in your financed car for a cheaper one.
If you have negative equity in your vehicle, you can either pay the difference out of pocket or ask the dealer to roll the difference into a new loan. However, if you have too much negative equity, taking out a loan may not be the best option. You’ll have a much higher monthly payment, which could defeat the purpose of trading in your current car.
Things to consider before buying a cheaper car
When you’re struggling to make your car payments, trading in your current vehicle for a cheaper model can seem like a great idea. However, there are a few things you should consider before taking this option.
First, determine if you even need a car in the first place. If you can rely on public transportation or can borrow a friend or family member’s vehicle, not owning a car may be your best bet. You will not be responsible for any payments related to the car, including maintenance, parking and insurance.
If you have to buy a car, make sure you choose a model that makes sense for you. For example, if you’re on a tight budget, avoid buying a very old used car that forces you to spend money on frequent repairs. You should also consider the cost of gas and insurance when shopping for a cheaper car.
Most importantly, always shop with your budget in mind. Choosing a cheaper car doesn’t have to be a permanent solution, but it can help you get your finances back on track.
Finance and insurance editor
Elizabeth Rivelli is a freelance writer with over three years of experience in personal finance and insurance. He has extensive knowledge of various lines of insurance, including auto insurance and property insurance. His name has appeared in dozens of online financial publications, including The Balance, Investopedia, Reviews.com, Forbes and Bankrate.
