Auto financing: Don’t let your car loan drag you under

Is your car burning up your paycheck? You’re not alone.

The total amount Americans owe on auto loans is at an all-time high and late payments have risen over the past couple years, according to the Federal Reserve Bank of New York. In the first quarter of 2017, about 1-in-26 car loans were 90 or more days late.

Here’s how to avoid or address troublesome car debt.

Buying? Be budget-savvy 

Cut your risk of car loan troubles by knowing how much car you should buy and understanding that the payment is just part of the cost of ownership.

Learn more: Best personal loans

“First thing people should do when car shopping is be conservative when comparing income to payment,” says Matt Jones, senior editor at automotive website Edmunds. “What ends up happening is that for many people, their car payment is only about half of what they have to pay for the car in the month.”

Add up everything car-related you’ll spend each month: payment, gas, insurance and maintenance. Aim to keep those expenses at no more than 20% of your take-home pay.

Running into payment problems? Be proactive

If you’re in danger of missing a car payment — or have just missed one — call the lender.

“Many lenders are open to talking and willing to work with you, especially if you're proactive,” says Vince Shorb, CEO of the National Financial Educators Council. Be clear about what you can pay now and when you’ll be able to make regular payments again.

A common outcome is loan deferment, where the missed payment is pushed to the end of your loan term. You might have to pay the interest owed this month, a late fee or both.

Consistently struggling? Rework your payment or budget

If you often have trouble covering monthly bills or have little left over for savings, get creative:

• Refinance: You might be able to refinance your car loan at a lower interest rate or longer term — either one will cut your payment. If your credit score is better than when you got the loan, you’re more likely to get a lower rate.
• Downsize your car: Sell your car and get a more affordable one. You’re likely to get a better price selling to an individual rather than trading it in at a dealership.
• Rework your budget: If you owe more than your car is worth, you might be stuck. Try reworking your budget so you can cover payments until you have enough equity to sell.

A last-resort option is voluntary surrender. It’s like repossession on your own terms, without so many fees. But it will hurt your credit score, and you’ll have to pay the difference if you owe more than the car is worth.

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Sean Pyles is a staff writer at NerdWallet, a personal finance website. Email:spyles@nerdwallet.com. Twitter:@SeanLoranPyles.

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