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Understanding Car Loans and Managing Payments

For many, a car is essential for daily activities such as commuting to work or school. However, with an average auto loan balance of $22,612, owning a car can be a significant financial commitment. If you’re finding it difficult to keep up with your car payments, there are several options to consider. O1ne Mortgage is here to help you navigate these choices. Call us at 213-732-3074 for any mortgage-related needs.

How Do Car Loans Work?

A car loan is a secured installment loan used to purchase a vehicle, which serves as collateral. You’ll make equal monthly payments over the loan term, which can range from 12 to 84 months. The interest rate on your loan depends on factors such as your credit score, income, repayment term, and the vehicle you buy. If you fail to repay the loan, the lender can repossess the vehicle.

What to Do if You Can’t Afford Your Car Payments

If you’re struggling with car payments, consider the following options:

1. Consider Selling the Car

Selling your car can help you manage your finances better. You might get enough cash from the sale to make a down payment on a less expensive vehicle. Alternatively, trading in your car at a dealership can cover part of the purchase price for a cheaper car, though you might get less money than selling it privately.

2. Negotiate With Your Lender

Contact your lender to discuss your situation. They might offer a forbearance, pausing your payments temporarily, or modify your monthly payment amount to make them more affordable.

3. Refinance Your Auto Loan

Refinancing involves replacing your current loan with a new one, potentially with a lower interest rate or longer repayment term. This can lower your monthly payment, but be aware of the total interest you’ll pay over the life of the new loan and any prepayment penalties on your current loan.

4. Voluntarily Surrender the Car

If you’re facing repossession, you can voluntarily surrender the vehicle to your lender. While this can damage your credit, it won’t be as severe as a repossession and can help you avoid certain repossession-related costs.

How Will Getting Out of a Car Loan Affect My Credit?

The impact on your credit depends on the option you choose:

Minimal Impact

• Selling the car: Using the proceeds to pay off the loan may cause a temporary drop in your credit score, but there’s generally no long-term damage.
• Negotiating with your lender: Depending on the agreement, it may or may not impact your credit score. A longer-term modified repayment plan might affect your score.

Large Impact

• Refinancing your auto loan: Applying for a new loan and opening a new account can impact your credit score, particularly the average age of your accounts.
• Voluntarily surrendering the vehicle: This can significantly lower your credit score, especially if you’ve already missed payments.

How to Avoid Going Upside Down on a Car Loan

Being upside down on a car loan means owing more than the car’s worth. To avoid this, consider the following:

• Make a large down payment: This can help prevent negative equity as cars depreciate over time.
• Opt for a shorter repayment term: While longer terms make monthly payments more affordable, they can lead to negative equity.
• Trade it in: Trading in a car with negative equity can be better than repossession, though it might result in being upside down on the new car loan.

Understanding the impact of your decisions on your credit score is crucial. If you’re struggling with car payments, consider the long-term ramifications and how to minimize the impact on your credit. For personalized advice and assistance, contact O1ne Mortgage at 213-732-3074.

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