Can’t Afford a Car Payment: What Are My Options?

Can’t Afford a Car Payment: What Are My Options?

What should you do if you can’t afford your car payments?


Irrespective of your situation, you’re evidently searching for a solution as you’re finding it difficult to pay your car loan. There’s no point in avoiding the matter, so let’s take a look at your options. 

It’s not really possible to foresee what could occur tomorrow, and even more difficult to know what’s going to happen in years to come – and the standard length of a car loan agreement is four years. Our circumstances can change drastically, and you might find that you’re no longer able to make your vehicle payments. 

Perhaps one of the first things to consider when you’re in this predicament is to contact your lender and explain the situation. You need to do this quickly and not hold off talking about the situation. You’re probably worried that you’re going to default, so this is definitely the first course of action. If you discuss your circumstances with them, there may be something they can do. They’re not going to let you off the loan, but they may have an idea of how to make matters a little easier for you. Sometimes they will allow you to have a payment holiday – sometimes it makes sense for banks to offer this to those who are having difficulties with their payments. 

It’s even more crucial that you contact your lender quickly if you are leasing your vehicle using a personal contract hire plan. This type of plan is long-term, and you would have committed to it, so you are really at their mercy. If you’ve taken out a personal contract purchase (PCP) or a hire purchase (HP) you’ll find that there are more avenues available to you. Although these are finance agreements, they are usually much more flexible and could allow you to reduce your monthly payments, perhaps even exchange your vehicle for a cheaper car, or let you to hand in your vehicle and walk away. 

Sometimes a lender will allow you to reduce the payments for a while, or maybe even omit some payments altogether. This approach is used to give you some breathing space, but they will of course add these payments to the end of your loan. This solution is often best used by someone who is having short-term financial issues, but it’s not necessarily the best route if you’re having ongoing trouble. 


What’s a personal contract hire plan?


Also known as “car leasing”, it’s basically a long-term rental of the vehicle. If you are the sort of person who likes to change their car often so that they always have the very latest version, then this type of leasing contract may be the simplest and most affordable path to tread. 

This type of plan lets you basically rent a new vehicle for between 2 and 4 years. You make a first payment and this is then followed by a number of fixed monthly amounts. And when you reach the end of the agreement, you can just give in the keys and walk away. You won’t have to pay anything as long as you’ve kept to the agreed mileage thresholds and the car hasn’t been wrecked. 

However, there is no facility to buy the car at the end of the contract, so you may really want to keep it, but this will not be an option. However, the plan is tailored to be simple, and the payments you make will tend to be lower than any finance alternatives.

But do remember that you won’t be considering your vehicle to be an “asset”, as there will be no equity at the end of it all. You’ll have paid out for a vehicle every month and have nothing to show for it when the agreement ends. But that’s the whole point of it. 

A personal contract hire plan is usually arranged to meet your own individual situation for a car loan. You can often adapt the first payment you make, and you can also adjust the term of the contract and how many miles you’re able to drive before you reach the limit. All of this will have an impact of the amount you pay per month. Obviously, the greater that first payment, the lower the subsequent monthly ones. You can also reduce your monthly payments by taking out longer contract terms too or lower mileage.

Don’t be fooled into giving too low a mileage threshold though. If you say your annual mileage is 10,000 but when you hand in the vehicle you’ve done 15,000, you will be penalized and you’ll have to pay a fee because you’ve overstepped your limit. 

This is definitely an option worth considering if you’re looking to keep your monthly payments fixed and reasonably low, but you’d like to be driving a relatively new model of car.


So, what about hire purchase (HP)?



As the name suggests, a hire purchase plan means that you can spread the car loan cost across a number of years at usually fairly low interest rates.

This type of contract does mean that you’ll be buying the car outright at the end. The purchase cost is distributed across fixed monthly payments that could have a term of anything up to five years. But you will own the car as soon as you’ve made that last payment on any car loans.

If you’re wanting to own the car when the contract comes to an end, you will generally tend to pay less across the board if you opt for a hire purchase agreement. Another benefit to a hire purchase agreement is that you also won’t have to provide a large final payment (this is often called the “optional final payment”) so as to become the owner of the car. Hire purchase is sometimes called “conditional sale”.

So what are the advantages of hire purchase? 

  • You can spread the cost of the car over monthly payments
  • You’ll find the interest rate is lower than it is with PCP
  • You don’t have to come up with a big last payment as you would with PCP
  • The hire purchase scheme is usually offered on both new and old cars
  • There is often a “no deposit” option

There must be some disadvantages though?

  • The monthly payments tend to be higher than they would be with a PCP finance agreement
  • With a hire purchase agreement, you won’t actually own the car until you’ve made that final payment
  • If the car’s value decreases more quickly than expected, you will lose out in the end
  • The higher monthly instalments may reduce the selection of vehicles available to you

The hire purchase agreement could be the perfect solution for you if you want to adapt the initial deposit and adjust the length of the term. These changes will of course affect the ongoing monthly payments, but it does mean that you can structure the hire purchase agreement to better suit your personal needs. It will pay off if you can manage to put down a fairly large deposit though, as your monthly payments thereafter will definitely be lower – and you’ll have a more agreeable interest rate to play with. That said, if you simply can’t afford to provide a large payment in advance, there are still a number of low-deposit and even some no-deposit schemes out there.

So, the stages for hire purchase are that you: 

  1. Make an initial deposit (the higher the better so that your monthly payments and interest rates are more affordable).
  2. Pay for the balance of the vehicle with a set of fixed monthly payments which will last for the term of the contract that has been agreed.
  3. You then become the legal owner of the car once you’ve paid that last instalment. You can then either retain or sell the car as you see fit.


Vehicle loan refinancing



If you’re lucky enough to have a strong credit score, it could be possible to refinance your car loan and thereby reduce your monthly payments to a degree that makes them much easier to handle. You can do so by taking out a loan for a longer period of time and therefore lowering the interest rate. This idea can be a bit pricey in the long run, but could be better than some of the other solutions. It may be that your present lender is happy to give you refinancing options – but it doesn’t hurt to look around at other lenders to see what they can offer.

Having your car loan through a branded dealership, e.g. Ford, means they are usually only prepared to offer you a single type of term, and they’re not that tolerant when it comes to refinancing. So it makes sense to look around at other lenders outside of your current loan plan.

Basically, if you’re wanting to lower your monthly payments on your current loan contract, or perhaps you want to keep hold of your vehicle after the term has ended, then refinancing could be the perfect solution for you.

It might be that you change from your present agreement to take on a new personal contract purchase or even a hire purchase contract. Most dealerships will be able to give you some options here, and, if you arrange the right deal you’ll have much lower monthly payments. It’s also possible to tread the refinance path by considering a bank loan.

The brass tacks of refinancing are that you settle your current finance contract with a single final payment. This could be carried out by taking out a new contract with your existing finance agent, or signing up for a loan with a third party. Either way, you’ll then need to pay for the new loan with a number of monthly payments.

Using refinance at the end of your PCP agreement will mean that you can then keep your vehicle, and the payments each month will often be lower than the agreement you had before – but that will all be based on the new interest rate and the term agreed.


Taking on a more affordable car

It’s often a more sensible route to trade in your vehicle for a cheaper and more affordable model – and maybe a better interest rate or better terms. It’s worth having a chat with your lender to see what deal they can do for you, but usually you get more bang for your buck if you go for a private sale. Check out the trade-in value of your car and then get a quote from a dealership, and perhaps you can then establish a fair price.


Should I sell my car?

The other solution would be to offer your vehicle up for sale. If you are able to sell it for enough money to pay off your loan then you’ll be in a better position all round. However, it could be that you’ll have to pay the difference between the sale price of your vehicle and how much you owe on the car loan before you can transfer the car to somebody else.


What’s voluntary repossession?

This is literally what is says on the tin. You simply hand your keys in and walk away from the car. This is usually a last resort option, and you do have to be mindful of the ramifications. Some state laws specify that the lender can still request the deficiency from you, i.e. the difference between the figure you still owe them and the amount that the car is worth (or sells for at auction). It is preferable to negotiate with the dealer before you walk this path.


Should I file for bankruptcy?

Oddly enough, sometimes filing for bankruptcy could prevent your vehicle from being repossessed. This process can also eradicate the debt you have for a car that may already have been repossessed or one that you’ve returned to the lender. However, it is worth discussing this option with your attorney first, as there are many details that aren’t always obvious at the outset.

So, it pays to research these options – either way, there is always something you can do to make your car payments more affordable. Get in touch with us today for more information.


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