How to Avoid Auto Loan Delinquency

Allowing an auto loan to go delinquent places you at risk of compromised credit and repossession of your vehicle. It is much easier to stay current on your debt than to recover once your loan has gone delinquent. Staying current means budgeting well, and it also means knowing when there is a risk you may not be able to pay. Anytime you face this risk, it is important to be proactive to avoid negative consequences.

Budgeting Effectively

The first step to avoiding delinquency on an auto loan is budgeting for the loan. This starts before you even go car shopping. You will need to know how much you can afford to pay toward a loan each month. To find this number, keep in mind that your total debts should never exceed one half of your monthly income. So, you can add together your other debts, such as student debts, mortgage, rent or credit card bills, and determine how much wiggle room you have for a new debt. When you shop for a car, look for one that allows you to stay comfortably within this range. Picking a car first and budgeting second can lead to loan disaster.

Setting up Automatic Payments

Most banks and auto lenders offer simple solutions to pay your car loan automatically each month. Your bank may have a bill pay system. If it does, you will need to know the account number for your car loan. Then, you can use the online banking system's bill pay function to transfer funds directly to your car loan account on a certain day each month. You can alternatively put a credit card or bank account number on file with the lender. Once a month, the lender will deduct your payment automatically. Make sure you have overdraft protection so your account is not overdrawn by your car payment.

Asking for Grace Periods

If you anticipate a time period when you will not be able to pay, you should contact your lender immediately to ask for a grace period. Lenders will usually be willing to work with you if you are in a financial crisis, such as a job loss or emergency illness. In any case, you will submit a letter describing your financial hardship and asking for a grace period. If the lender approves this period, make sure you are ready to continue payments upon conclusion of the grace period. Missing a subsequent payment may be grounds for default on the loan.

Refinancing an Auto Loan

Your financial crisis may be extended beyond your grace period, and this can be a reason to refinance your loan. If your ability to pay the loan is permanently affected, your lender may even refinance with you directly. This can save you the hassle of seeking a new loan from a third party. Deciding to go to a third party can temporarily drop your credit score and result in penalties to the initial lender. However, if this is the only way to avoid delinquency on the loan in the future, it is a better option than continuing with a loan you cannot afford.