Car loan modification: How it works

Are you experiencing financial hardship and struggling to afford your car payments? If your lender offers modifications on car loans, you may be able to get some relief. Auto loan modification involves adjusting your monthly payment amount, due date or sometimes your interest rate. When you are behind on payments, these options can help you avoid damaging your credit score or losing your car.

What is car loan modification?

A car loan modification involves a lender agreeing to change the terms of your car loan to enable you to successfully make payments. The lender may decide to lower your interest rate, defer your payments in the short term or change your payment due date so it works better for your budget.

Getting an extended loan term is also possible, which stretches your loan balance out to lower your monthly payments. But extending the repayment period also means the lender has more time to collect from you. You’ll pay more interest overall unless you get back on track and pay the loan off early.

Lenders don’t like repossessing cars because it costs them money and effort, but you will still need to plead your case to get your loan modified. You must convince the lender that you won’t be able to repay what you owe unless they modify your loan. This could involve providing financial documentation to prove you are experiencing hardship.

You can also learn other tips on preventing repossession in our guide.

Auto loan modification vs. refinancing

It’s easy to confuse auto loan modifications with auto loan refinancing, but the two aren’t quite the same. Both may get you a lower payment, but unlike auto loan modification, refinancing your loan involves swapping your current loan for a new one with different terms.

When your application for refinancing into a new loan is approved, the lender will pay off your old loan, and you’ll resume payments with the new lender. With car loan modification, you’ll instead work with your current lender throughout the entire process.

Refinancing also requires you to prove creditworthiness and your vehicle to meet certain requirements around your car’s age and mileage.

Pros and cons of car loan modification

As with any big financial decision, it’s important to consider the pros and cons before pursuing an auto loan modification.

Pros of car loan modification

• It can help you catch up on payments and avoid losing your car.
• It may lower your auto loan interest rate.

Cons of car loan modification

• It could negatively impact your credit if your lender reports the loan modification to credit bureaus and does a hard credit inquiry during the modification process.
• Extending your loan term will increase your overall interest costs.
• The car loan modification process can be lengthy and time-consuming.

How to get a car loan modified

You’ll need to contact the lender who originated the loan directly to discuss your situation and determine your eligibility for a loan modification.

Follow these steps to start the process.

1. Call your lender right away

Notify your lender that the auto loan payments are no longer affordable, and you risk falling behind soon. Explain your circumstances and why you are struggling to make payments. The representative may share temporary options for relief but ask to speak with someone who can further assist you as you’re seeking a long-term solution.

It’s a good idea to explain that you want to keep the vehicle but need help accomplishing that goal. It’s also worth mentioning if you’ve been a good customer and historically managed your loan responsibly. Be specific, and use a friendly tone during the call.

2. Put your request in writing

If loan modification is available, you’ll typically be required to put your request in writing. You’ll submit the request, proof of your hardship and any other information or documents the lender requests. Some lenders may require a formal application.

Give the lender as much detail as possible about your situation. If you lost a job or experienced some other significant or unexpected life change, share that information in your hardship letter. It is also a good idea to explain how the modification will help, such as allowing you to continue making on-time payments.

Your lender may also require financial documentation such as copies of your monthly bills and bank statements or pay stubs.

3. Confirm your hardship request was received

Once you turn all the documents in, the waiting game to hear back from the lender begins. In the meantime, try to pay what you can. The lender may repossess your car while you await a decision on loan modification.

Keep the team helping with your modification in the loop, explaining that you are still trying to make payments even amid financial challenges.

Is auto loan modification right for you?

Consider modifying your car loan if your financial situation has suddenly changed due to a job loss, temporary layoff or furlough, medical emergency or another circumstance out of your control. It could also be a smart financial move if you have recently experienced reduced wages.

You may also want to explore a loan modification if your car is worth less than what you owe. This means you’re upside-down on the loan. If you sell a car while you’re upside-down, you’ll have to cover the difference between the sales price and what you owe.

Bottom line

It can be stressful if you can’t afford your car payment and aren’t in a good position to refinance. Consider reaching out to your lender to request a car loan modification.

Ask about reduced monthly payments, a decreased interest rate or an alternate monthly due date if that will help you make timely payments. You can use an auto loan calculator to see how different rates may make your payments more affordable. If modification is not an option, other programs may help you find relief until you get your finances back on track.