There are strict regulations in Australia for dealing with customers who are suffering financial hardship.
Flexible solutions are available if you are suffering a temporary setback or a more permanent change to your income that places your financial commitments out of reach.
But what if the financial stress is more subtle? Your expenses have been creeping up, and you are finding it hard to cope.
In this article, we will discuss what options are available to you if you are struggling to meet your car loan repayments.
Levels of Financial Difficulty
Financial pressure can take on many forms. Some are temporary, others are permanent, and the action that you can take will vary significantly depending on your circumstances.
The scenarios below will not cover all types of financial distress that someone may go through.
However, it will allow us to frame a set of appropriate actions for those in these loose categories.
General Financial Stress
The recent inflation crisis and cost-of-living increase have eaten away at everyone’s disposable income and slowly strained household budgets.
So the concept of financial stress is likely a relatable one.
If you have a series of new expenses, even if they are small, they add up fast, and meeting your car loan obligations can become more challenging.
While a car loan may be slightly less flexible than other commitments, you do have options, which we will cover shortly.
Temporary Hardship
When you have an unexpected life event, it can throw your finances into chaos.
Perhaps you lost your job without notice, or something as simple as slipping over and breaking an ankle limits your ability to work (this happened to a friend of mine).
All lenders are obligated under law to offer hardship assistance, which may include:
- A short-term moratorium on interest and repayments.
- Temporary reduced repayments.
You should contact your lender as soon as you know that you will be short and request hardship assistance.
Permanent Hardship
Other misfortunes will have a permanent impact on your income or expenses.
This is often a result of an accident or other health-related concern.
Again, you should first speak to your lender to advise of the situation, and if you are unable to reach a resolution, you should contact one of the following for help:
What Happens If I Can’t Pay My Car Loan
If you do fall behind in your payments and have not taken steps to make alternative arrangements with your lender, you are at risk of consequences.
The severity will vary depending on the amount owing, your financial situation, and future prospects.
Missed Payment
If you have missed one payment and make it up within a few days, then there should be no lasting effects.
You may incur a fee from your lender and/or your bank if you have had a payment reversal, but it will not be visible on your credit file.
Arrears
If you remain in arrears longer than 14 days, then it may become visible to other lenders via your credit report.
You are also likely to start receiving payment reminders via phone, SMS, email, and post.
While this can be a minor blemish on your credit file, as long as you correct the issue swiftly, it can be explained when apply for a loan in the future.
Default
If you are in arrears longer than 60 days, then a lender has the option to list a formal default on your credit file.
By this stage, a lender will have tried to contact you multiple times to understand why you have fallen behind and to resolve the situation.
Once you have a default listing it will remain on your credit file for 5 years. The status of the account will also be visible to future potential creditors.
It can be very difficult to get finance with unpaid defaults.
Once you repay the debt, your default listing will be updated to reflect the Paid status. So any potential lender can see if you have eventually done the right thing.
Vehicle Repossession
Most car loans will be secured, which means the asset could be repossessed in the event of non-payment.
What you may not realise is that the cost of recovering the vehicle will be added to your balance, and tow trucks are not cheap!
The vehicle will be sold at auction, which will usually achieve a much lower price than a private sale or trade-in.
If there is a leftover balance then you are obliged to repay this, or things could continue to escalate.
Court Action
Once a lender has exhausted all avenues to get you back on track, things can become much more serious.
The debt could be outsourced to a specialised collections agency or sold to a debt buying firm.
Regardless of who is managing the account, the eventual consequence could involve court action. If a judgment is obtained, then you could face enforcement action to recover the funds.
This could include your wages being garnished, or property being seized and sold to repay the debt.
All legal costs are added to the balance, and you may find yourself repaying far more than you ever borrowed.
Options When You Cannot Afford Your Car Loan
To avoid the consequences of non-payment, you need to be proactive if you cannot afford your car loan repayments.
Refinance the Loan
If you have paid down the loan over time, you could refinance the remaining balance and reduce your repayments.
This can provide the breathing room you need, but it could potentially cost more in the long run as interest will be payable over a longer period.
However, we often find that refinancing can help a customer get a better interest rate and save money while also reducing their repayments.
Everyone’s situation is different, so if you would like a free review of your refinancing options, then submit an enquiry below and our team of brokers will be in touch.
Sell the Car
If you know you have to give up the vehicle, then selling privately is likely to get you the best sale price.
Compared to a repossession and sale at auction you are going to come out well ahead if you proactively sell the vehicle.
You will need to advise the lender of the sale if it is a secured car loan. They will need to remove their security interest to enable the transfer of ownership.
Voluntary Surrender of the Vehicle
If you can’t or don’t want to deal with the sale process, you can speak to the lender about surrendering the secured vehicle.
This will save you the cost of repossession, which can be over $1,000.
However, the car will still be sold at auction, which is not ideal. It is still a much better choice than falling into arrears and eventual repossession.
Hardship Agreement
Lenders are obligated to offer reasonable assistance under the law. Most major lenders will have a whole department that specialises in managing hardship situations.
The easiest solution is often to just make that phone call to your lender and explain your current circumstances.
Speak to a Financial Counsellor
If you get nowhere with your lender, or just need some general help getting your debts under control, then speak to a financial counsellor.
This is a public service for vulnerable consumers and should not cost you anything.
If there are fees involved then they are not financial counsellors and you should move on. Paid budgeting services or debt mediators often cost you as much as you save.
When to Talk to Your Lender
The short answer is as soon as you know you may have trouble paying your car loan.
As we have seen throughout this article, all consequences are associated with inaction.
You cannot be defaulted when discussing hardship arrangements with your lender. If you intend on selling a secured vehicle you need to advise your lender.
So do it first, and before you miss a payment, to ensure the best outcome.
Conclusion
The fear of the unknown can be significant when dealing with financial pressure and often leads to inaction when someone cannot pay their car loan.
Now that you know your options you are able to be proactive and take control of your financial circumstances.
If you would like to review your car loan and see if there are cheaper or more appropriate options for your current circumstances, then get in touch below.
