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When Your Loan Outlives Your Car


When Your Loan Outlives Your Car

It’s a tough situation! Your car breaks down, but you still have a balance on your loan. You are expected to pay back the money on schedule – regardless of the condition of the vehicle. But if the vehicle is disabled while you still owe money on it, you may find yourself in a bind. Here are some things you can do to help.

What to Do Now

Continue to pay the loan. If you are able to do so, make one large payment to pay off the remaining balance. Depending on the amount and your financial circumstances, this may not be an option. Continue to make scheduled monthly payments on your auto loan until it is paid off. If you are having difficulties making your scheduled payments, explain your situation to your lender to see if they can help.

Keep your insurance current. If you lose the use of your car due to theft or accident, your insurance company will pay off your loan. This will theoretically help you qualify for a new loan for another car. Many car loans require insurance as a condition of the loan, so keep the vehicle insured until the loan is paid in full.

Roll the balance into a new loan. An auto dealer may work with you to roll the remaining balance of your current loan into a new loan. It is not ideal to have a loan balance that exceeds the value of the vehicle. However, many working families need a reliable car just to get to work. Therefore, financial institutions may approve a car loan in this situation, but will put a limit on how much over the value of the vehicle you can borrow.

How to Avoid This Situation in the Future

Don’t skimp on maintenance. Many breakdowns are preventable – or they can be delayed until after you’ve paid the car off. Don’t neglect routine maintenance. Get your oil and filter checked and changed as scheduled. Also, have your transmission fluid, brake fluid, and coolant checked regularly. Monitor the wear and tear on your tires. Have them balanced and rotated as needed. Don’t neglect the spare. Pay special attention to your tires as you transition from one season to another. Bad tires cause accidents.

Buy “GAP” (Guaranteed Asset Protection) coverage. Unless you come up with a large down payment, chances are you will, at some point, owe more on the loan than the car is worth. If you crash your car, your insurance company will reimburse you only up to the insured value of the car. But if you have “GAP” coverage, your insurance company will reimburse you enough after an insurable event to pay off the loan.

Consider the warranty. Think about purchasing the warranty on your used car (available at floridacentral). If a major engine, transmission or drive train issue is a risk you can’t afford to bear, then you might need to consider buying the warranty. Otherwise, you run the risk of owing money on a car you can’t even drive.

Consider a shorter loan term. Longer-term auto loans are becoming more common. Extending out the term may allow you to get a lower monthly payment or afford a more expensive vehicle. But as your car depreciates, you run the risk of becoming “upside down,” or owing more on the loan that than the car is worth.

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