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What to Do When You Can't Make Your Loan Payments

In a downward economy, many people are faced with unemployment, salary reductions, depreciating home values, 401(k) losses and piling up bills that aren't getting paid. You may be wondering, “What do I do if I can't make my loan payments?” There may not be one simple answer to get you out of debt, but there are options that can help alleviate some of the stress and get your payments under control.

VEHICLE LOAN

  • Contact your lender. What many people don't realize is that it's in their best interest to contact their lender if they're having trouble making their auto loan payments, rather than avoiding them. A lender wants to get paid and keep you as a customer, so they are often willing to work out a repayment plan that is suitable for your current situation.
  • Renegotiate loan terms. Depending on your payment history, the reasons why you cannot pay, your credit score or other factors, a lender may allow you to defer your payment by 30 days. The lender may also offer to refinance your existing loan. Depending on the rates available at the time, you may actually lower your interest rate if you refinance. A lender may also be able to increase the term of the loan to lower your payments.
  • Sell your vehicle. Selling the vehicle and paying off the loan is also an option if the value is more than what you owe. If you can't afford the vehicle anymore, sell it and find something less expensive that works with your current budget.
  • Avoid having your auto repossessed. It's usually best to sell the car yourself to get the most value, and then pay off the loan. Some customers who cannot make payments decide to voluntarily return the vehicle to the lender. This is called "voluntary repossession" and will negatively affect your credit score and you will still owe the lender the difference between the balance of the loan and the selling price at auction, which will likely be less than if you sold it yourself. However, you won't be charged the expenses of a physical repossession.

MORTGAGE LOAN

  • Understand your mortgage loan. Knowing what kind of loan you have—Adjustable Rate Mortgage (ARM), fixed rate or a combination of both—can help you determine your options. Contact your loan servicer if you are unsure. If you have an ARM and your payments are going to increase, you may be able to refinance to a fixed rate mortgage. Beware of prepayment penalties, or if you're planning on moving soon, it may not be worth the
  • Determine your options. If you're unable to make your payment, contact your loan servicer, even if your request has been turned down before. They will want to know the "why" behind your delinquent payment: Is it temporary? What has changed in your life? How much equity do you have? Do you want to keep the home? What payment plan would work for you? New programs and options might be available that you may not be aware of. Your lender should be able to provide you with this information, but you can visit makinghomeaffordable.gov for information on refinancing, modification and foreclosure alternatives. Or, hud.gov for additional program options. It's better to be proactive and find a solution before you get behind on your payments.
  • Prevent Foreclosure. Losing your home through foreclosure has long-lasting effects on your credit and ability to buy in the future. If you've fallen behind on your payments, discuss foreclosure prevention options with your loan servicer. If your problem is temporary, you and your servicer may agree to a future date to repay the past-due amount, plus fees and penalties. Forbearance is also an option if your income has been reduced temporarily. Your payments will be reduced or suspended for a period of time, then you will make your regular payment, plus additional payments until your loan is current. This obviously doesn't work if you are in a home you can't afford. If your situation is not temporary, you'll need to consider a loan modification or selling your home.

CREDIT CARDS

  • Make the minimum payment. If you can, always make the minimum payment on your credit card to avoid late fees, a rate increase and a ding on your credit report. Credit cards generally have some of the highest rates around, so try to avoid charging large amounts on your card if you can't pay it off every month. If you can't make the minimum payment, contact your credit card company before missing the payment to discuss your options. Let them know your situation and that this is a one-time occurrence. Ask for an extension and for the late fee to be waived. Because the interest is so high, always try to pay off credit card debt before other debt.
  • Find another source for the money. If you own a home and have equity (the value exceeds the loan amount), you can obtain a home equity loan or line of credit. Rates are lower than credit card rates, so you can pay off your high-interest debt first. If this isn't an option, personal loans generally have better rates than credit cards. Zero-percent interest credit card balance transfer promotions are tempting, but could pose a problem if your situation isn't temporary, so use them sparingly.
  • Get help. Credit card debt can get out of hand in a hurry. To help reduce debt, contact a credit counseling service, such as the National Foundation for Credit Counseling (NFCC) a non-profit organization that offers money management advice and solutions to your current financial problems. They can help consolidate debt, create a budget and possibly negotiate lower rates on your behalf.

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