What To Do if You Can’t Afford Your Car Payment

With auto loan delinquencies at new highs, consumers are looking for ways to reduce or refinance their debts and experts say options are out there.

Why Auto Loan Default Rates Are Up

“The increasing price of vehicles both new and used, along with the steady interest rate hikes over the past year, have really created an affordability problem for many,” according to Ted Lyons, vice president of financial services for AAA Northeast. “Couple that with inflation, where everyone is paying more for just about everything out there, and the resumption of student loan payments, then you have a bit of a perfect storm.”

To put it into perspective, the average cost of a new car is about $48,000, according to the latest Kelly Blue Book data. Interest rates for used cars average 13.5% for buyers with fair credit, but those with the worst credit scores can pay as much as 21%, according to the Experian State of the Automotive Finance Market, resulting in payments that could be as high as $1,000 a month. 

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Age Groups Struggling Most With Car Loan Payments

Millennials, Gen Z and subprime borrowers (borrowers with lower than optimal credit scores) have the highest auto loan default rates, probably for many of the reasons Lyons cited.

Large numbers of 18- to 39-year-olds were 90 days past due on $20 billion in auto loans, according to Federal Reserve data from 2022.

Younger people were the most aggressive in taking out car loans after the pandemic, when interest rates were lower and stimulus checks were rolling in. Now, with the increasingly high price of car ownership and other compounding debts, many of these borrowers are having a hard time keeping up.

Can’t Afford Your Car Payment? These Are Your Options

If you are in default on a car loan, turning the situation around is possible, but it requires a bit of creativity and discipline.

• As soon as you miss a payment or think you will, contact the lender immediately. Under some contracts, a lender can repossess a car after one missed payment.
• It’s possible that the loan can be put on hold or the terms renegotiated to extend the time to repay it. Even changing the loan due date might help. But this will not work for everyone. “If the borrower is already delinquent, getting an approval [to refinance] may be difficult and recent rate increases may decrease the benefit,” said Lyons. “They likely had a lower rate when they first took the loan.” Apply to refinance with AAA.
• Ask family members or friends for financial help or a short-term loan and prepare an agreement for paying them back.
• Sell the car and buy a cheaper one. A used car will be less expensive and have a lower insurance rate, but if you don’t net enough to pay off the loan, you could be stuck.
• If the car is dangerously close to being repossessed, consider surrendering it to the lender. Your credit rating will still take a hit, but it won’t be as severe as it would be if the car were repossessed. You might still owe money if a balance is left after the car is sold at auction.
• Look for a side job so you can put that money toward the car payment.
• Review all your expenses and make adjustments, Lyons suggested. “See if there is anything you can cut out of your monthly spending that isn’t necessary.”

Need help financing a car? AAA has you covered with our great auto loan products.