During the coronavirus pandemic, many Americans are left wondering what to do if they can’t make their car payments, and what this means for loans with co-borrowers. With so many borrowers applying for unemployment, and others furloughed or laid off, many lenders are working with people to help get everyone through this difficult time.
Co-Borrowers and Your Income
When it comes to co-borrowers, they’re almost always spouses or domestic partners. The lender combines both borrowers’ incomes to meet the requirements during the approval process, since an auto loan with a co-borrower that’s a spouse means that their incomes are co-mingled, or combined. Once the car loan is approved, both borrowers are equally responsible for it.
This means if one of the borrowers was bringing in most of the household income, and they lost that income, both borrowers are still responsible for making the car payments. Both also risk major damage to their credit if there are any late or missed payments, a default, and/or a repossession.
However, not all hope is lost. There are a few options to explore to avoid a default – especially considering the present circumstances brought on by the coronavirus.
Talk to Your Lender!
If you’re a co-borrower, and you’ve been afraid to contact the lender, you shouldn’t be. Chances are your lender doesn’t want you to default, either.
Lenders who have to move forward with a repossession typically lose money on most of those auto loans. Once a car is repossessed, the lender has to go through the expensive and taxing process of retrieving the vehicle, storing it, and later selling it at auction to recover at least some of the loan balance. Cars that sell at auction don’t normally receive the full amount owed on the vehicle.
On top of this, the fees associated with a repossession are on you and the co-borrower. You must pay the lender the cost of the collection company, the storage facility, auction fees, and any remaining balance on your loan (called a deficiency balance).
If these aren’t paid, the total amount is usually sent to collections which further harms both of your credit scores. Additionally, a repo and other associated negative marks can remain on your credit reports for up to seven years, which, in some cases, can reduce your ability to get another auto loan for at least a year.
Most of the time, everyone loses when it comes to a default on a car loan. So, talk to your lender. Many are stepping up and voluntarily working with their borrowers during the pandemic. Many of the automaker's finance divisions are offering deferment plans for car loans as well as leases, and some are adjusting payment due dates to better fit their borrower’s schedules. You won’t know if you qualify for help unless you ask.
You and your co-borrower should let your lender know if you’re worried about falling behind on payments as soon as possible. The quicker you act, and the more communication you have with your lender, the better your chances of working something out before things go south on your auto loan.
Other Options for Co-Borrowers
If your lender can’t do anything for you at this time, you and your co-borrower may be able to look into refinancing your car loan. This can be a great option for those who don’t want to default or lose their current vehicle. During the refinancing process, you can also remove a co-borrower or cosigner from an auto loan – if you can qualify on your own.
Almost exclusively, refinancing a car loan is done to make the monthly payment more affordable. There are a few requirements to meet before you’re considered for refinancing and they vary, but typically, lenders require that:
- Your car has equity
- You’re current on payments
- Your vehicle has fewer than 100,000 miles
- Your car is less than 10 years old
- Your payments have been consistent over the course of the loan
- Your credit score is good or has improved since the start of the loan
These requirements aren’t hard and fast, but most lenders generally use these for refinancing approval. If you and your co-borrower are approved for refinancing, it can work in a few different ways.
Refinancing can lower your interest rate or lengthen your loan term – sometimes both. By just extending your loan term, your monthly payment drops, but you risk paying more in interest charges since the loan is longer. However, if you only need relief on large car payments temporarily due to the coronavirus lockdowns, you can offset the longer loan by making larger/extra payments in the future to help offset the additional interest charges while paying off your auto loan more quickly.
If you and your co-borrower, or your vehicle, don’t meet the above requirements, and your lender isn’t able to help you, it may be time to look into another (more affordable) car.
Finding a Dealership to Work With
If one co-borrower is no longer able to make the payments, the other co-borrower is expected to pick up the slack. But if that isn’t possible right now, and refinancing isn’t in the cards, trading in your current vehicle for one that’s more affordable with more manageable car payments might be a good solution.
At Auto Credit Express, we’re still working hard to connect borrowers in all types of credit situations to dealerships all over the country that work with subprime lenders. To get matched to a dealer near you, simply fill out our auto loan request form. It’s secure, free, and you can complete it right from home.