When a consumer is experiencing financial difficulties, a creditor may lower the payment to prevent the loan from going into default. When a creditor modifies the loan terms, he must issue a new contract that voids the original loan contract. However, the lien remains on the vehicle, and a creditor has a right to repossess it if a debtor stops making payments.
How Loan Modification Works
Lowering a monthly payment amount on a car loan is a good solution for most debtors. A creditor can do it by extending a loan term by a few months or a couple of years depending on the collateral. A debtor will pay slightly more in interest over that time but this is a better option than default and repossession. A creditor may lower the loan interest rate to lower the payment. When a creditor modifies a loan, he must give a debtor a copy of the new loan agreement.
Vehicle Repossession Under New Contract
Loan modification does not affect the lien on the vehicle. The lien remains until you have paid off the loan and allows the creditor to repossess your vehicle without notice if you miss a payment. The new loan contract will specify when a creditor may repossess the collateral. Many creditors usually give debtors time to catch up on missed payments. A creditor may start a repossession process when a debtor misses two or three monthly payments. You should read the new contract to find out when a creditor may repossess your vehicle.
Negotiating With Creditor
In some situations, you may still find it difficult to make payments even after a contract has been modified. If your financial problems are short-term -- for example, due to a strike or a temporary lay off -- you should contact the creditor and ask for a deferment. In some cases, a creditor may postpone a payment for up to three months. The interest will continue to accrue during that time. A creditor may modify the loan by further extending the term and lowering the payment even more if the collateral allows it. Lenders generally consider the value of the collateral when making a decision.
Alternatives to Repossession
If you cannot make payments under the new loan contract, you may try other, less costly options. You can try selling the vehicle if the value is the same or more than the loan balance. You may consider voluntary repossession. While it still makes a negative affect on your credit, your surrendering the vehicle cuts the repossession costs that you will ultimately have to repay. Bankruptcy is an option if you have other debts and cannot afford the payments.
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