How Debt Settlement Can Help You Pay Off Your Auto Loan Balance
Hey there! If you’re struggling to make your monthly auto loan payments, you’re not alone. Auto loans can be super stressful, especially when money gets tight. But there are options out there that can help you get out of debt faster – and for less money. One potential solution is debt settlement. Here’s how it works and whether it could be right for your situation.
What is debt settlement?
Debt settlement, also called debt negotiation or debt relief, is an agreement between you (the borrower) and your lender to settle your auto loan for less than the full remaining balance. Basically, the lender agrees to accept a lump sum payment that is less than what you owe in exchange for considering the loan “paid off.”
-For example, let’s say you owe $15,000 still on your car loan. Through debt settlement, you might only have to pay $10,000 or $12,000 to settle it. This can save you a bunch of money and help you get out of debt faster.
How does debt settlement work?
Here are the typical steps for settling an auto loan:
- You stop making your regular monthly payments to the lender.
- The lender eventually agrees to negotiate a settlement since you’ve fallen behind.
- You make a lump sum payment that is less than the remaining balance.
- The lender considers your loan paid off and releases the lien on your car.
It’s important to know that when you stop making payments, you are technically in default on the loan. This can hurt your credit score. However, settling the debt for less than you owe should keep it from being as damaging as a repossession or bankruptcy.
Should you negotiate a settlement yourself?
You can try to negotiate a settlement directly with your auto lender. But most people have better success working with a professional debt settlement company. Here’s why:
-- They have experience negotiating with lenders.
- They know what settlement offers are realistic.
- They handle all the communications for you.
- Lenders take them more seriously than individual borrowers.
A reputable debt settlement company will thoroughly review your financial situation. They’ll help you decide if settling your auto loan is the best option. If so, they’ll negotiate aggressively on your behalf to get you the best possible settlement deal.
Weigh the pros and cons
Debt settlement can help you save money and get out of debt faster. But it also comes with some drawbacks. Consider the key pros and cons:
Potential pros
- Pay off your loan for less than you owe
- Resolve debt without bankruptcy
- Get out of debt years faster
- Reduce stress of unaffordable payments
- Avoid repossession of your vehicle
Potential cons
- Hurt your credit score in the short term
- Lose your car if settlement fails
- Owe taxes if debt forgiven over $600
- Pay fees to debt settlement company
- No guarantee lender will settle
As you can see, there are good reasons to settle your debt. But you need to be prepared for the negative impacts too. For many people, though, it’s worth it to resolve their auto loan and get a fresh start.
Alternatives to consider
Debt settlement is one option, but not your only option. Here are a few other strategies to consider for dealing with auto loan debt:
Loan modification
You may be able to get your lender to modify your loan terms to make the payments more affordable. This could mean reducing your interest rate, extending the repayment period, or temporarily deferring payments.
-Refinancing
If your credit is still decent, you may be able to refinance your auto loan at a lower interest rate. This can reduce your monthly payments to a more manageable amount.
Sell your car
Selling your car and paying off the loan with the proceeds is often better than defaulting or settling for less. You’ll still have to come up with the difference if you owe more than it’s worth.
Look at the pros and cons of each option carefully. Make sure you understand the impacts to your credit, finances and transportation before deciding how to handle your auto loan.
-Questions to ask yourself
Here are some good questions to think through as you evaluate debt settlement for your situation:
- How far behind am I on my payments?
- What is my remaining loan balance?
- What is my car currently worth?
- Can I afford my monthly payments?
- How strong is my credit score?
- Can I get by without this car if repossessed?
Being honest with yourself about factors like these will help you make a smart financial decision.
When to avoid settlement
Here are a few situations where debt settlement may not be advisable:
- You can afford your regular monthly payments – Look at options to lower them instead.
- Your credit score is still good – Refinancing may be better.
- Your car has high resale value – Selling it could eliminate the debt.
- You still depend on the car for work – Defaulting could risk repossession.
- You have other assets to tap – Using savings could be better.
The bottom line is that if you have other viable options, debt settlement should probably be your last resort.
The debt settlement process
If you decide to move forward with settling your auto loan, here is a general timeline of how the process usually works:
- Stop payments – You’ll be advised to stop making monthly payments. Expect to be in default within 1-2 months.
- Save up – You’ll start setting aside lump sum settlement money in a dedicated account.
- Negotiate – It may take 2-6 months for the lender to be willing to negotiate a deal.
- Settle debt – Once agreed, you pay the lump sum, and the lender releases their lien.
- Rebuild credit – With the debt resolved, you can start improving your credit right away.
The exact timeline varies between lenders. But most auto loan settlements take 4-12 months from start to finish. It requires patience but can be worth it.
Finding the right company
The debt settlement company you choose can make or break your chances of success. Here are some tips for picking a reputable provider:
- Look for 5+ years of experience with auto loans.
- Ask about their average settlement amounts.
- Read reviews from real customers.
- Understand their fees.
- Check their BBB rating.
Avoid any company that charges large upfront fees before settling your debt. The best firms earn their fees based on success at delivering results.
What to expect with your credit
Let’s talk about the credit score implications. Settling your auto loan for less than you owe will likely have these impacts:
- Your credit score will drop significantly when you default.
- The lender will note the settled debt on your credit report.
- It stays on your report for 7 years from the settlement date.
- Your score starts recovering after the loan is settled.
The damage is not as bad as bankruptcy or repossession. If you address other debts responsibly, your credit can recover within 12-24 months.
Tax implications
One catch to be aware of is the potential tax impact of debt settlement. If your lender forgives $600 or more of what you owe, the IRS considers that canceled debt taxable income.
So if you settle a $15,000 auto loan for $10,000, you may have to pay income tax on the $5,000 difference that was forgiven. Just something to factor in.
Is debt settlement right for you?
Here are some signs debt settlement could be a good option for your situation:
- You owe significantly more on your car than it’s worth.
- You can’t lower your monthly payments enough through other means.
- Your credit score is already damaged.
- You have some lump sum money available to settle.
- You are at high risk of default or repossession.
On the other hand, here are signs it may not be the best move:
- You can still afford restructured loan payments.
- Your credit score is still decent.
- You have other assets or income to tap.
- You depend on the vehicle for work.
- You owe less than the car’s resale value.
Every situation is different. But evaluating factors like these can help determine if debt settlement is a viable solution for you.
Other debt relief programs
Besides debt settlement, you may also want to look into:
- Debt management – Pay off debt through a DMP without settling for less.
- Credit counseling – Get guidance from a non-profit credit counseling agency.
- Debt consolidation loan – Combine debts into one lower payment.
- Balance transfer card – Shift credit card balances to a 0% APR card.
Each of these programs has pros and cons to weigh based on your needs and financial situation. The right option depends on factors like your income, debts, assets, credit score and more.
Take control of your situation
If your auto loan has become unaffordable, don’t ignore the problem. And don’t assume options like debt settlement are off the table. Get informed, talk to professionals, and take back control of your financial situation.
With flexibility and determination, you can reduce your auto loan burden. And you can get back on the road to financial freedom!
References
[1] https://www.nerdwallet.com/article/loans/auto-loans/auto-loan-debt-relief
[2] https://www.bankrate.com/loans/auto-loans/car-loan-settlement/