It’s 2020, and what everyone thought was going to be a good year turned out to be one of the worst in recent memory – and we’re not done yet.
Many people invested in long-term plans way before 2020. Some of those plans involved taking out loans, perhaps to get a new car. Things may have been peachy paying off those first few years, but if the loan involved amortizing your way through 2020, chances are you may be having a hard time making those payments this year.
Fear not, because you have a few options in front of you. Despite having reputations for just “taking your money”, you’d be surprised how understanding banks and other financial institutions are when it comes to their clients’ financial situations, especially when it involves a national disaster or global pandemic.
Here are a few options you can take if you’re having a hard time paying off your car loan.
1. In-house deferred payments
When the COVID-19 pandemic started and quarantines were being imposed, the grand majority of banks made deferment options available for almost all loan payments. If you have not availed of this option, now may be a good time to ask your bank about it. In most cases, deferred payment options allow you to skip paying for a few months, the exact number of months allowed depends from bank to bank.
In return, you can extend your loan duration by the same number of months. For example, if the bank allowed you to skip three months’ worth of payments, and your last loan payment was originally scheduled for March 2021, then your new completion date would instead be June 2021.
An alternate arrangement would be for you to skip several monthly payments, but there would be a slight increase in future payments to compensate while keeping your original schedule. As details differ from bank to bank, be sure to talk to your bank’s loan officer for the best route available for you.
2. Loan restructuring/refinancing
Even without a pandemic, banks typically offer restructuring or refinancing options. This option has therefore become fairly popular during the pandemic. In a nutshell, you can approach your bank and, if allowed, restructure your remaining payments to make them lighter but stretched out for a longer duration.
Let’s say you have 24 months left on your amortization, for which you pay P40,000 per month plus interest; you can ask your bank to restructure your remaining payments so that you instead pay roughly P20,000 for 48 months, plus interest.
While having interest payments stretched out means you’ll be paying a little more overall, the lighter monthly payments are usually well worth it, especially in times when earnings are a little tight but having a car is a must. There are also debt consolidation companies who can do this for you by completely paying off your loan with the bank, then having you make financing arrangements with the company, though it’s always best to approach your bank first before taking this option.
Perhaps you’ve decided that the consequences of the situation would not be worth keeping the car. For example, you may have bought the car for use as a ride-sharing vehicle, but with no customers during the pandemic, the car is idle but your payments remain.
Technically, you can’t sell a car that you’re still paying for since, officially, you don’t own the car yet – you can’t sell what you don’t own. However, there is the option for “assumption”. You seek a “buyer” for the car, but what technically happens is that the buyer doesn’t buy the car from you. Instead, the buyer assumes all future payments on the car and ideally pays you for the payments you’ve already made.
When payments are done, the car then belongs to the person who assumed the loan. Making this arrangement requires the prior and written consent of the bank, so if you would like to have someone else assume your car loan, make sure to visit the bank that’s financing your loan first. Inform them of your new arrangement with the buyer. You’ll both be called in to sign some papers and make the assumption official.
After that, you can hand over the car to the buyer and you’re free from paying for the car.
4. Tap into your savings
You know that money you’ve been setting aside for a rainy day? Take out your umbrella, because this is that day. Having your earnings interrupted and still be able to pay your bills is exactly what a rainy day fund is for. Sure, the habit you’ve developed putting money into that account may make it uneasy for you to take money from that account instead, but that’s what it’s there for.
That said, be prudent; don’t go around splurging those savings. Take what only what you need, in this case, just enough payments to cover the months of your car loan where your earnings are not able to pay for it.
5. Voluntarily let go
If worse comes to worst, you may have to simply stop payments and let go of the car. If this is the option you choose, be smart, and don’t wait for repossession agencies to take your car by force. Banks typically don’t repossess if you miss a payment or two, but a third month of missing a payment means they will typically take action, especially if you avoid contact. Once a bank repossesses your car, you’re often placed in a bad standing not just with that bank but other banks as well.
However, voluntarily approaching the bank and (assuming other options are not viable) surrendering the car keeps you in good standing with your financial partners. Doing this may even open doors for more lenient options since banks are also at a loss if they repossess a car. Once surrendered, an unpaid car will often go into storage awaiting auction to a bidder to cover the remaining loan.
If this happens and you remained in good standing with the bank, you can still potentially regain your car if you perhaps find a windfall and wish to take the car back before it is auctioned. This would often mean paying for all your remaining payments outright, but banks will often allow the first refusal by the would-be owner over other bidders.
The past few months have been hard for most people, for sure. Hopefully, these tips can help keep you afloat when it comes to handling your car loan. But with quarantines easing up, all of us can look forward to better times ahead, and hopefully once again be able to meet our financial responsibilities head-on.
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