What can be done if a bank cancels an arranged payment on a car loan?

In a tough economy when jobs are being lost and finances are tight, it is often a struggle to make car payments. Many people find themselves in a situation in which they are behind on car payments and can no longer afford their car — or can't afford payments to buy another car (see Cheap Cars - Options). Cars are being repossessed and returned to banks and finance companies at an alarming rate.

Even when people can no longer make payments and voluntarily return their cars, they find it doesn't solve their problems. In fact, it often makes the problem worse. Problems are especially acute for people with upside down loans – they owe more than their car is worth.

If you arrived at this page because you are looking for repossessed cars for sale or auction, see our article, Repo Car Sales and Auctions. To stop making payments on a car loan, or having missed a series of payments, puts the car loan in "default." The definition of "default" can vary between lenders, but it is always explained in the loan contract.

The contract defines the conditions under which a loan goes into default and what can happen as a result. Let's take a look at the problem and examine some possible solutions. Many people feel that if they could just get a little lower monthly payment, they could keep their car and continue paying off their loan or lease.

One way, they feel, is to refinance their loan or lease. It seems to work with home mortgages, so why not car loans? It's important to understand that refinancing a car loan (or home mortgage) is not simply a matter of the bank or loan company changing the interest rate or other factors.

It means getting a new loan to pay off and end an old loan. Or a new lease to pay off and end an old lease. Regarding refinancing a car lease, let's get it out of the way now and just say that car leases are almost impossible to refinance.

It simply costs too much to end a lease to make it worthwhile to end one lease and begin another. Furthermore, there are no longer lease finance sources, banks or finance companies who do used-car refinance leases. Back to the topic of refinancing car loans.

Unless loan interest rates have changed significantly since you bought your car (rates change very slowly), or your credit score has improved significantly (which might get you a better interest rate), or you extend the length (term) of your loan by another few years (do you really want to be still paying on an old car years from now?), refinancing your car loan may not affect your monthly payment significantly enough to make it worthwhile. But you should investigate anyway because every situation is different. If you bought your car brand new and your loan was a new-car loan, any refinance loan now will be a used-car loan.

Getting a used-car refinance loan is like getting any other used-car loan. Banks, credit unions, and online car loan companies such as Auto Credit Express offer them. Applying and getting a quote are free and gives you a chance to determine if you'll benefit from refinancing, even if you have bad credit.

We already mentioned that your credit score is the most important factor that will affect your ability to get a refinance loan and will determine how much interest you'll be charged. Therefore, it is important that you know your credit score prior to applying for a loan. You can get your credit score instantly online, for free with a simple enrollment, at the web sites such as CreditReport.com.

They show you the same credit score that car dealers and loan companies already know about you. If you can't afford your current car payments, you could consider trading for a cheaper car. This might work if your current loan payments are too high and you would like to trade down to a less expensive car to lower those payments.

It works best if you are not "upside down" — if you don't owe more on your loan than your car is worth as a trade vehicle. Your dealer takes your old car, pays off your loan, and applies the remaining "equity" as a down payment on your new car. If your new car is less expensive than your old car, then you have an excellent chance that your new payments will be lower than your old payments.

However, most people in this situation are upside down — they owe more on their loan than their car is worth. They have negative trade equity. Trading to buy a cheaper car may not, and probably will not, result in lower monthly payments.

The negative equity from the old loan is added to the cost of the new car, which means the new car may not be so cheap after all, and monthly payments will likely be higher than before. Furthermore, a bank or loan company will not approve a loan amount greater than the value of the car, unless the dealer can somehow "hide" the negative equity from them. However, this technique could work if the amount of negative equity is relatively small, the price of the new car is significantly less than the old car, and the new loan is longer than the remaining time on the old loan.

Again, this rarely works for leased cars. Although dealers might try to convince customers otherwise, trading a leased car is almost never a good idea and will not solve affordability problems. Although you get more money by selling than by trading, the same issues apply.

If you are upside down on your car loan, the selling price won't cover your loan, and you would have to add cash to make up the difference to pay off the loan, to get the title to give to the buyer. Then you would have to come up with more cash or a loan to buy another car. This can be difficult or impossible for most people who are already in a tough financial situation.

If you are not upside down, selling your car is much easier. You can sell your car and use part of the sale money to pay off your loan. You could then use the remaining money as a down payment on a cheaper car — and lower monthly payments.

If you need a cheaper new car, try one of the Online Pricing Services such as TrueCar that provide discounted dealer prices that include any manufacturer discounts and rebates. This free service also provides you a low price guarantee on the car you want. Can I change my car loan to a lease to get lower payments?

Short answer: No. Long answer: Finance and loan companies can't simply change a loan to a lease. Theoretically, you could accomplish your objective by getting a new lease to pay off your old loan, and enjoy much lower payments.

However, in the current economic situation, there are no longer any finance companies who will provide a lease on a used car. This wasn't true as recently as a couple of years ago, but it's true now. It might change in the future when the current credit crunch is over.

What if I just can't make my car payments? If you can no longer make your car payments, or debts have closed in on you, and you have missed payments, your car is in danger of being repossessed. State laws partly define what is considered a "default" that allows a repossession, and it differs between states and finance companies.

The definitions are spelled out in your loan or lease contract, in the fine print. If you have defaulted, your bank or finance company has the legal right to come take (repossess) your car. Laws also determine how, when, or if you are to be notified.

What happens if my car is repossessed? If you have missed a series of car payments the bank or finance company exercises its right to repossess your car and hires a "repo" company to find and pick up the car without notifying you in advance. The car is soon sold at a wholesale car auction.

A judgment will be filed against you in court and you will be sued for your loan balance, minus the amount received from the car sale. You could owe thousands of dollars, plus repo fees, storage fees, and administration fees. But the worse part is that your credit record will now show the repossession, and will damage your ability to get new loans or other credit for up to seven years.

Furthermore, you have no car — and almost no chance of getting another loan for another car. Not a good situation to be in. You could voluntarily turn in your car to your bank or finance company (not your dealer) but it is still considered a repossession with all the same issues.

The only thing you avoid are the repo man's fees. If you currently have a good credit score, you should take extra measures to avoid a repossession.