Auto Loan Debt Settlement
How Auto Loans Are Different

Auto loan debt settlement does not work the same way as settling most other debts, such as an outstanding credit card balance. With a credit card, you fall behind on your payments or cannot pay for whatever reason, so you settle the debt for a sum lower than the total balance and your credit score takes a hit as a result.

However, with an auto loan, there is one major difference. This is a secured loan where the vehicle itself is the collateral on the debt. With a secured loan the creditor does not have to worry as much about getting paid because they can simply repossess the asset, in this case the automobile.

Negotiating a Car Loan

That said, you still have a few options for negotiating a better deal on your car financing if you get stuck in a binf. Just like any other lender, creditors on auto loans are not likely to alter your loan while you're still making the required minimum payments.

In order to have a chance of renegotiating the loan with the original creditor, you'll need to be able to provide hard evidence of real financial hardship which prevents you from being able to service the auto loan debt.

You will then have to suggest an alternate plan for how you can pay the loan and give a convincing reason why it will be in the lender's best interest to let you do so. For instance, if the value of the vehicle has dropped markedly, and most importantly below the loan balance, you might have some leverage.

Here are a few points you will want to consider when trying to make a deal with your auto lender.

• Try to get them to lower the interest rate on the loan.
• Try to get them to extend the loan term thereby lower in the monthly payments.
• Look into the possibility of refinancing through a consolidation loan.

Let's look at this last point in greater depth.

An Alternative: Debt Consolidation

Another option that may work for you if you are in trouble on an auto loan and need to keep the car would be a consolidation loan. This is best for people who have multiple outstanding debts in addition to the auto loan debt. To do a debt consolidation you would roll all your debts into one loan, preferably with a low interest rate and an acceptable term.

The only drawback here is that often the best way to get a good deal with a consolidation loan is to secure it against the equity in your home. If you do not own a home your options are more limited. On the downside, if you do not correct the financial problem that got you into trouble on your outstanding loan debt in the first place, you may end up losing both your vehicle and your home.

Borrowing for Another Vehicle

Keep in mind that after an auto loan debt settlement it will be virtually impossible to get another reasonable deal on a car loan for some length of time.

Getting a loan is not simply determined by your credit score. Potential lenders will look at the specifics on your credit report and if they see you have defaulted on a car loan in the recent past they will not readily give you another auto loan without some type of penalty. The penalty could be a high interest rate or short loan term or the inability to get the loan altogether.

Many times, the only lenders who will do business with you after an auto loan debt settlement will be charging exorbitant fees and interest rates, making it even more likely you'll sink further into debt.