Car Loan Modification: A How To Guide

March 18, 2013
car loan modification document

If you are seriously delinquent on your car loan payments, a car loan modification could help you keep your car and avoid repossession. Auto loan modifications are simply adjustments to your monthly payments (and sometimes your interest rate) which are made to help you avoid repossession. Banks sometimes allow for loan modifications as a final, and last-ditch effort to avoid having to take the car away from you. Not all banks will allow you to modify your car loan. However, if you know you simply can't afford the payments, trying costs you nothing.

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Is Car Loan Modification Right for You?

Since a car loan modification can often be a lengthy and difficult process, you should make sure that it is the right decision before proceeding. Here are some situations in which a car loan modification might be warranted:

  • Upside Down Car Loan: If you're upside down on your car loan, meaning you owe more than it's worth and wouldn't be able to pay it off even if you sold it, then you may qualify to modify your loan. An auto loan modification is different than a refinance, but can have some of the same benefits. The bank you are dealing with on the current loan may modify the loan amount for you, bringing you out of what may seem like an impossible situation.
  • Lost Your Job: If you have been a victim of the economic downturn and have subsequently lost your job, or there has been another change in your income, making your car payments may feel like a lost cause. If you had been making your payments until a recent event changed your ability to, then you may be able to apply for a loan modification.
  • Car Lost Value: If your car is not worth what you owe, either from financing issues or accidents that weren't your fault, then applying for a car loan modification could benefit you. You may or may not be approved based on these circumstances, but you can always talk to the bank about your options.

Bottom Line: If you have suffered a financial setback, you are better off asking for a loan modification than just letting the loan default. The bank would much rather work with you to prevent more loss than to go through the expense of sending the repo man to your driveway.

Why Lenders Allow You to Modify Your Car Loan

It is in the finance company's interest to accommodate the consumer's needs, as they stand to lose money (usually) in a repossession. Realistically, lenders do not want to repossess cars because of all the accompanying headaches involved in preparing it for resale. Statistics show that the costs for resale and sending to auction have escalated dramatically during the past decade.

How to Get a Car Loan Modification

Ok, now that you've decided that a car loan modification is right for you, here are some steps you can take to give yourself the best chance at having your monthly payments reduced:

Step One - Call Your Lender
Call you lender them know that you're no longer able to make payments the way they're currently structured. Your lender will instantly tell you about the dangers of not making your payments and the possibility of repossession. Ultimately, they do not want your car.

The further behind you are on your payments, the more receptive many banks become to the idea of a loan modification. However, there is no guarantee your bank will actually grant you a loan modification.

As a general rule of thumb, only the lender who originated the initial loan will be able to modify it for you. The other option is to go through an attorney. This is less popular because you will have to pay legal fees, and the attorney just goes through the lender anyhow. If you find a company that offers to do an auto loan modification outside of your original lender, then the chances are pretty good that what they are offering is a loan refinance. It may not be a bad idea, but you need to understand that it's not a modification.

Step Two - Prepare Your Documents
If your bank approves the idea of a loan modification, they will most certainly require documentation regarding your hardship or reasons for not being able to make your payments. They may require notarized letters or affidavits, copies of phone or utility bills, bank statements, pay stubs or any number of other documents. Send all requested documents to your lender.

  • Hardship Letter: In most cases you will need to provide the lender with a hardship letter. Your letter should include the specific reason you are requesting a modification. It you've had to contend with medical bills, job loss, death of a family member, divorce, military duty, or even a failed business, these are all things the lender will take in to account. Remember that if the hardship was caused by overspending on your part you may not be eligible through the lender for a modification. Be honest and make the letter unique to what you're going through. You can find many sites that will provide you with samples, but be sure not to copy them.

Step Three - Wait and See
Once you have submitted all the requested documentation to the lender, there's not a whole lot you can do, except wait. You should also be aware that repossessions can occur while applying for a loan modification. Many times, departments within the same bank simply don't communicate very well. If repossession occurs, there won't be anything the modification department can do to help you. Even while applying for a loan modification, try to pay something toward your current monthly payments. Also, make sure to ask the modification department to inform the repossession team of your intentions.

Step Four - Weighing Your Options
When you modify a loan there are a few different things the lender may offer. In some cases the lender may lower the interest rate and remove any fees associated with delinquencies. The lender may also offer to take past due payments and add them to the back of the loan. This will bring the loan current and take your interest back to an affordable rate. If this doesn't help enough, you can ask the lender to see if they can reduce the loan amount. You'll be much better off if you have a specific term in mind. If you've lost your job, the lender may allow you to make reduced payments until you've found another job. Sometimes they will offer you a set amount of time instead. Just talk to the lender and see what they can work out.

  • Refinancing: Contacting other companies that may want to take on the risk of the loan for different terms may also be an option. Many times, another finance company may be able to offer a lower interest rate on the life of the existing loan, or extend the life of the loan. Both will lower the monthly payments (though you may pay more in interest if you extend the existing loan term), and will save you money on the overall life of the loan. Just know that this falls into a whole separate category of "Refinancing" and is NOT a car loan modification.

Everyone goes through tough financial times at some point in their life, so you shouldn't ever feel guilty or ashamed if you find yourself in a situation where you need to modify the terms of your car loan. By being proactive and actively working to modify your payments, you can avoid getting yourself into even worse shape by possibly having a repossession on your record. By following the steps listed above, you should be able to get yourself back on the road to full car loan repayment.

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