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 much-needed 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 car loan modification is

You may be wondering: can I change a car loan contract? That short answer is yes.

As the name implies, a car loan modification entails changing the terms of your loan. The lender may agree 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.

It’s also possible to get an extended loan term, 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.

Loan modification is not readily available to all borrowers, though. Lenders don’t like repossessing cars because they lose money by canceling a loan and taking on an asset that loses value once it’s driven off the lot, but you will still need to plead your case. You must convince the lender that you won’t be able to repay what you owe unless they agree to 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.

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. It’s worth mentioning that you’ve been a good customer and managed your loan responsibly. But if you’ve missed payments in the past, it could be more challenging to convince the lender to modify your loan. Either way, 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. 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.

How to know if you should modify your car loan

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 far 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.

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.

Refinancing has several requirements that loan modification does not:

• You’ll likely need good or excellent credit to qualify.
• You’ll have to go through the same application process as when you took out your current loan.
• Most lenders also have refinance requirements stating that the mileage on your car does not exceed 100,000 miles.
• You probably won’t qualify if your vehicle is over 10 years old.

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

The bottom line

It can be stressful if you can’t afford your car payment and aren’t in a good position to refinance, but don’t quite have the option to go without a car. 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.