Automoblog Tips for Managing Auto Loan Debt

How To Manage Auto Loan Debt (2022)

  • Options like refinancing can help you pay less over the life of your auto loan.
  • Consider which debt management strategies work best for your financial situation.
  • It’s important to stay on top of loan payments to avoid the consequences of defaulting.

Americans hold a total of $1.4 trillion in car loans, according to Consumer Reports. This number has grown significantly over the last decade, and many financial analysts believe we’re overpaying on our auto loan debt. While factors like the rising cost of cars play a role in growing auto loan debt, many people encounter challenges when they fail to anticipate how buying a car can impact their personal finances.

A car loan is a significant financial investment, but it doesn’t have to be stressful to manage. There are steps you can take to ensure your monthly payments work with your budget, from choosing a loan term that fits your financial needs and shopping around to find the best interest rates for your situation.

However, external factors or changes in your personal situation can sometimes make it difficult to meet your financial obligations. Defaulting on a car loan can lead to severe consequences that impact your financial future, so it’s important to ensure you’re able to make your monthly payments. This guide offers strategies to manage your auto loan debt.

Refinance Your Auto Loan

Do you have the best auto loan rate for your situation? Interest rates change over time and vary based on personal factors, meaning you may be able to refinance your loan for a better rate than you currently have. A difference of even a single percentage point in an interest rate can significantly impact how much you pay for your loan overall.

If you get the best car refinancing deals – complete with lower rates and better terms – over time, you could end up paying less in fees and interest. Whether average interest rates have dropped or you recently took steps to improve your credit score, refinancing can reduce what you pay over the life of your car loan. 

While refinancing is often a good financial strategy, there are some pros and cons to consider before making a decision.

Refinancing ProsRefinancing Cons
Lower your monthly paymentAdditional fees associated with refinancing
Can choose a shorter or longer loan term, depending on your needsNot an option for all borrowers
Tap into your car’s equityDepends on average interest rates at time of refinancing

Negotiate Debt Settlement

Many creditors will accept a lump-sum payment in exchange for forgiving a portion of delinquent debt. This is called a debt settlement. The payment can typically cover anywhere from 10% to 50% of the debt, which frees up monthly funds to pay off other debt.

A report from the American Fair Credit Council on consumers in crisis claimed that, on average, debt settlement helps people save $2.64 for each $1 fee assessed. It’s one of the most efficient ways to reduce payments and manage debt. However, like with refinancing, there are some risks to consider.

To successfully negotiate a debt settlement, you’ll likely need to stop making your minimum monthly payments before you begin negotiations or connect with a debt settlement program. People with delinquent debt often have more negotiating power than those still making payments, according to analysts at Investopedia. However, when you stop making payments, your debt will increase and there is no guarantee that the settlement company will cover all your fees. The Consumer Credit Bureau warns that accumulated fees can cancel out any savings from debt relief programs. 

Finally, keep in mind that debt settlement will have a negative impact on your credit score, no matter your strategy or outcomes. However, once you get your payments under control, you will see your credit score improve over time.

Debt Settlement ProsDebt Settlement Cons
Reduce your debtNegatively impacts your credit score
Frees up money to handle other debt obligationsNo guarantee that the settlement company will cover all fees
Can help avoid bankruptcyLender may not accept debt settlement offer

Set Up Autopay for Monthly Payments

Autopay can help people manage their debt by preventing it from accruing in the first place. Working with your creditor or your bank, you agree to a regular schedule, and payments are automatically withdrawn from your account. Especially for those who have multiple loan or credit accounts beyond just their auto loan, this can be a helpful way to keep up with all financial obligations without risking missed payment fees.

While Autopay can be a reliable method to help manage debt, it may not be the best strategy for all borrowers. Autopay can backfire for those who do not have enough funds in their account to cover their payments, which can lead to additional fees and penalties. It can also become challenging to track multiple autopay 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 drawbacks.

Autopay ProsAutopay Cons
Avoid missed payment feesPossibility of overdraft fees from your bank
May receive a discount from some lendersTracking multiple autopay accounts can be difficult
Don’t need to remember to schedule payments

Manage Other Types of Debt To Help With Your Auto Loan

While each of these strategies can be helpful in managing your auto loan debt, you may have other debts that have an impact on your financial situation and ability to pay your auto loan. Consider some of these methods that address other debt accounts to improve your financial stability.

Pay Down Revolving Debt

Revolving debt is a way for people to enjoy purchases before they are fully paid for. Credit cards, borrowing against a line of credit, and pay-later options are all ways to accrue revolving debt, and they can easily get away from you if you’re not careful. 

Americans with revolving debt paid almost $111 billion in interest and fees in 2021, according to research from the Brookings Institution. Revolving debt is easy to accumulate, so it’s important to create a strategy for managing it. Some strategies to consider include:

  • Paying more than the minimum monthly payment
  • Making payments on accounts with the highest interest rates first
  • Avoiding additional lines of credit whenever possible
  • Taking 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 tackle your auto loans more easily.

Refinance Other Outstanding Loans

Auto loans aren’t the only kinds of debt that can be refinanced. You can manage your car loan more effectively if you are also managing your other debts successfully. Two of the most common kinds of debt in America – mortgages and student loans – can be a good place to start.

Mortgage Refinancing

Refinancing your mortgage can lower your monthly payments, which frees you up to pay more on other debts, like your auto loan. Mortgage refinancing works in the same way as car loan refinancing and can be a smart choice if average interest rates have decreased since you took on your original mortgage.

Refinance Your Student Loans

The average student loan debt balance is $37,014, according to research compiled by EducationData.org. About 43.4 million people have federal student loan debt, making it challenging for many to take out other types of loans, such as car loans. Refinancing your student loans may provide you with better terms, which could allow you to handle this debt and others more easily.

Bottom Line on Managing Your Auto Loan

An auto loan is a significant financial undertaking, and managing your auto loan debt is essential to ensuring your financial stability. Before taking on a car loan, consider your budget and other financial obligations to make sure you’re able to make your monthly payments for the duration of your loan contract.

Whether you choose to refinance your car loan or address other debts you may have, these tips and strategies can help make managing your auto loan debt a simpler process. When you have a plan in place to manage your debt, you can enjoy your car without stress as you pay off your loan.