Fortunately, you have several options to explore, but the key is to act quickly and assess your situation. In this article, we’ll walk you through what happens when you lose your job while financing a car, and what steps you can take to manage this situation effectively.
Initial steps to take after job loss
Firstly, stay calm. It’s natural to feel panicked, but taking control of the situation from the outset will help you manage it better. Begin by reviewing the details of your car finance agreement.
Some contracts include clauses that offer protection in cases of financial hardship, so it’s worth knowing your rights and obligations.
Next, contact your lender as soon as possible. It might feel intimidating, but many lenders are willing to work with you during tough times, especially if you’ve been a reliable customer up until now. Being upfront about your job loss allows them to offer support and discuss any possible solutions.
Temporary solutions
Payment holidays
One of the first options your lender may offer is a payment holiday. This allows you to temporarily stop making payments or reduce them for a short period.
While this can provide some breathing space, it’s important to remember that interest will continue to accrue, meaning the total amount you owe will increase slightly by the end of the finance term. Make sure you fully understand the long-term implications before agreeing to a payment holiday.
Lowering monthly payments
If a payment holiday isn’t right for you, another potential option is to negotiate a reduction in your monthly payments. Lenders may be willing to extend the term of your finance agreement, lowering your monthly payments while keeping you on track with your loan. However, this will also extend the time it takes to pay off the vehicle and increase the total interest paid over time.
Refinancing the car
If neither a payment holiday nor lower payments are enough to help, you could look into refinancing your car. This involves taking out a new loan to pay off the existing finance, typically at a lower interest rate or with better terms.
Refinancing might make your monthly payments more affordable, but bear in mind that your credit score and financial situation will play a role in securing a favourable deal.
Permanent solutions if financial struggles persist
Voluntary termination
If your financial struggles look like they might be long-term, you may want to consider voluntary termination of the car finance agreement. This is when you hand the car back to the lender.
Under UK law, if you’ve paid at least 50% of the total amount owed on the car, including fees and interest, you have the right to terminate the agreement without penalty.
While this may seem like a drastic step, it could be the best option if you can no longer afford the payments. However, it’s important to note that this can impact your credit score, and it may be more difficult to obtain car finance in the future.
🚗 Read more: What’s the difference between voluntary termination and voluntary surrender?
Selling the car
Another option is to sell the car, provided the finance agreement allows it. If your car is worth more than what you owe, you can sell it, pay off the finance, and potentially have some extra money left over.
However, this can be tricky if your car’s value has depreciated below the remaining balance of the loan. Be sure to get a proper valuation of the car and consult your lender before taking this step.
Repossession
If you’re unable to make payments and don’t take any action, your car could be repossessed by the lender. Repossession can have severe consequences for your credit rating and future ability to secure finance.
It’s always better to explore other options, such as voluntary termination or selling the car, before letting it get to this stage. Remember, communication with your lender is crucial in avoiding repossession.
How job loss impacts your credit score
When you lose your job and struggle to make payments, missed payments can start to show up on your credit report. Even one missed payment can lower your credit score, making it harder to secure finance in the future.
Defaults and repossessions are even more damaging. However, being proactive and working with your lender can often prevent this. Taking advantage of payment holidays, refinancing, or other options means you might avoid defaulting on your loan and harming your credit.
🚗 Helpful article: How to improve your credit score.
Seeking financial advice and support
If you’re feeling overwhelmed by your financial situation, it’s a good idea to seek professional advice. A financial advisor or debt specialist can help you weigh up your options and create a plan that works for you.
There are government and charity resources available for people who lose their job and face financial hardship. These organisations can offer guidance, and in some cases, even direct support.
It’s also worth creating a strict budget during this time to prioritise your expenses. Cutting unnecessary spending and focusing on essential payments can give you more breathing space while you look for a new job.
In summary
Losing your job while paying off a car on finance is undoubtedly a challenging situation, but it’s not without options. From negotiating payment holidays to voluntary termination or selling the car, there are various ways to manage your car finance during this difficult time.
The most important thing is to stay proactive—reach out to your lender, explore the options available, and seek professional advice if needed. With careful planning, you can navigate this financial storm and come out the other side in a more stable position.