How to Manage a Car Loan

By: Tristin Hopper

How to Deal with a Car Loan Default

When you start to see a default looming on the horizon, try to sort it out long before tow trucks start showing up in your driveway. First off, you can try to renegotiate your loan. Many creditors would rather work out a deal with you than go through the hassle of repossessing and reselling a car. Give your creditor a call, explain your situation and work out an alternative payment plan. If you wait until after your car's been repossessed, it's likely to be too late for negotiations.

Alternatively, you can sell the car on your own, and use the proceeds to pay off the remainder of the loan. This will save you the hassle of repossession and avoid a mark to your credit rating. However, since you don't technically have ownership over your car, you'll have to check with your lender about how to arrange a sale. In some cases, the lender will require a direct payment from the buyer before it will release the title to the car. And be sure to sell the car yourself without using an agent. You'll make more money, and be in a better position to fully pay off the loan.


If you are "upside down" on your loan, you may have to conjure up a bit of extra cash after selling your car. If you don't have the money on hand, you may be able to do this with a personal loan, home equity loan or by borrowing from your retirement fund. Friends and family, if asked very nicely, can also be persuaded to pull out their checkbooks to spot you for a loan deficiency.

If all else fails, consider a "voluntary repossession." Drive the car to your creditor and hand over the keys. You'll still owe the balance of the loan and you'll still have a damaged credit rating -- but at least you'll be spared the expense of a professional repossession. 

Related How Stuff Works Articles


  • American Financial Services Association. "Understanding Vehicle Financing." July, 2008. (January 17, 2010)
  • Americans Well-Informed On Automobile Retailing Economics. "Vehicle Repossession Prevention." (January 17, 2010)
  • Bradford, Stacey L. "Cheap Car Financing." January 24, 2005. (January 27, 2010)
  • Bragg, W. James."Car Buyer's and Leaser's Negotiating Bible." Random House Reference. 2004.
  • Chatzky, Jean. "Find $10/day: Refinance your car loan." September 24, 2004. (January 15, 2010)
  • Credit Union Direct Lending."Business Intelligence Report." April, 2008. (January 27, 2010)
  • Dratch, Dana. "10 Steps to Your Best Deal on a Car Loan." December 8, 2009. (January 27, 2010)
  • Dunleavey, MP. "Your Three Worst Debt Consolidation Moves." (January 21, 2010)
  • Federal Trade Commission. "Knee Deep in Debt." December, 2005. (January 15, 2010)
  • Federal Trade Commission. "Vehicle Repossession." November, 2008. (January 15, 2010)
  • Healey, James R. "Cars Loans Stretch to 7 Years or Longer." February 13, 2008. (January 27, 2010)
  • Industry Canada. "Debt Consolidation." (January 16, 2010)
  • J.D. Power and Associates. "Auto Financing Tips." (January 18, 2010)
  • Mello, Tara Baukus. "How Repossession Affects Credit Score." November 6, 2009. (January 27, 2010)
  • Sahadi, Jeanne. "How much car can you really afford?" November 13, 2003. (January 17, 2010)
  • Sutton, Remar. "Don't Get Taken Every Time." Penguin Books. 2007.
  • Unofficial DMV Guide. "Creating a Car Budget." (January 20, 2010)
  • Visual "How the Average U.S. Consumer Spends Their Paycheck." July 8, 2009. (January 27, 2010)
  • Wells Fargo Financial. "What You May Not Know About Auto Loan Consolidation."
  • Weston, Liz Pulliam. "The Real Reason You're Broke." (January 20, 2010)
  • Weston, Liz Pulliam. "How to Sell a Car You Don't Own." (January 21, 2010)