How To You don't have to get a refinancing loan to reduce your car payments.
It is not uncommon for car-buyers to become trapped in unsustainable car payments.High interest rates, poor credit, a minimal down-payment, or purchasing from a "buy here, pay here" dealer are some of the reasons for this.Default is a possibility if these conditions are combined with financial hardship such as a job-loss, medical situation, or unexpected bills.If the conditions aren't favorable, the situation becomes more complex.In this case, the only other option is car-loan modification, which often occurs via the use of financial hardship assistance programs with your lender.
Step 1: Understand what a car loan modification is.
Loan modification is an option if you are late or missing car payments.Loan modification is similar to refinancing in that it involves a change in the terms of the loan to make it more affordable.Loan modification can involve a lot of different things.An extension of your term, which lowers your monthly payment but increases your interest over time, could be included.It can also include forbearance, which means making little to no payments for a specific period of time.There is a different approach to loan modification by every lender.Some lenders do not allow it at all, while others have financial hardship programs for borrowers with difficulty repaying.The "loan repayment solutions" program at Toronto-Dominion Bank offers distressed borrowers individualized plans that can include modification, forbearance, or several other options.
Step 2: There is a difference between loan modification and loan refinancing.
Modification and refinancing are very different.Replacing an existing loan with a new loan that has a lower rate or more favorable terms is referred to as refinancing.For borrowers who are in a distressed condition, a modification is taking the existing loan and adjusting the terms for a short time.Modification is a better choice for individuals with poor credit.Repossessing a car is not a good option for the lender.There can be a lot of costs involved in preparing a car for resale.Simply restructuring the loan is a simpler option for a bank.Refinancing is a permanent solution, unlike loan modification, which is often temporary until the modification is relieved.Reduced payments can be made if you suffer a job loss.
Step 3: Determine if the car loan modification is right for you.
The process of modifying a car loan can be difficult and time consuming, so it's important to make sure it is the right option for you.You may qualify if your car loan is underwater.If the car were to be sold, your debt would leave you with outstanding debt.Modification can help correct this if you had an accident that reduced the value of your car.A loan modification can be used to correct the effects of a job loss or income reduction.If you are in a situation where a default is likely, modification should always be explored as a way to reduce payments, as the lender would rather explore options than default.
Step 4: Do you qualify for a loan modification?
You will need to demonstrate you qualify in order to get a loan modification or hardship assistance.It depends on a number of factors.It's important to have a good track record of trying to repay debt.They are more likely to assist you in a modification if you have a positive track record of trying to repay debt and working with the lender.Unforeseen circumstances lead to your inability to pay.Any factor beyond your control can include a job loss, divorce, medical emergency, or any other factor.If your financial situation is such that you cannot afford to live while making payments, it is worth approaching the lender.
Step 5: The DIR is the debt-to-income ratio.
It allows you to determine how much debt you have, and if modification is likely to be accepted.The DIR is the ratio of your monthly debt payments to your income.Divide your monthly debt payments by your income to calculate it.If you pay $1000 a month to various forms of debt, and your income is $1500, you would have a high DIR.It is considered reasonable between 30-40%.
Step 6: Contact your lender.
If your lender has an official financial hardship or loan modification program, look online or call them.Follow the instructions to proceed if they do.Explain your situation to your lender if they don't have a specific program.If you're worried about being at risk of default, make it clear that you can't continue making payments under the current arrangement.If loan modification or assistance is an option, the lender will let you know.Default is not a good option for most lenders.You should tell the lender that you want to pay the loan.Let them know that you will be able to pay the loan in full with some assistance.
Step 7: The documentation needs to be prepared.
The process is not over just because the lender agrees to the idea.Several documents are likely to be requested by the lender.Prepare to include paystubs, phone bills, utility bills and bank statements.
Step 8: Write a hardship letter.
It is always a good idea to submit a hardship letter if it is not required.This letter will show you why your car payment is not affordable and why you are spending more money.You should include the reasons why you are requesting a modification.Refer to Part 1, Step 3 above, and make sure you demonstrate that you have been making honest efforts to repay, that there has been unforeseen circumstances beyond your control, such as a job loss, income reduction, medical expenses, illness, divorce, or death of a family member.Don't be afraid to include numbers that confirm your income reduction.Provide a request for new terms.The end date for the new reduced payment could be included.Make sure to specify how much you can afford and how long.Unfavorable terms can be extended if you are too open.
Step 9: Wait for a response from your documentation submitter.
You can wait to hear back from the lender after the application is complete.Try to make payments during this time.It's important that the individuals responsible for the modification are aware of the process so that they don't lose their home.
Step 10: The lender's offer was responded to.
Depending on what they have available to them, the lender may offer a variety of options.Lower interest rates, reduced payments for a short-term, or adding missed payments to the back of your loan may be included.Make it clear that the new terms will not decrease your odds of default.It reduces the chances of the lender coming back with something unfavorable if you are clear about what you need and how much you can afford.
Step 11: After the agreement is signed, make sure to restructure your budget.
When the hardship plan is temporary, this will help you improve your finances.Modification of a loan can be a time consuming process, but if you stick to the new terms and restructure your budget, you can begin the process of improving your credit.