Saving Your Credit Score When You Can’t Make the Car Payment

Couple Holding Stack Of BillsLast year, when the government decided to boost new car sales by offering “Cash for Clunkers,” some of us worried that this incentive would do more harm than good. And for many, that worry has become a reality.

Now, thousands who were content driving a “paid for” older car are driving new cars with hefty payments. And unfortunately, many of those thousands are now among the unemployed.

If you’re among those who are wishing you’d stayed with that old car, here’s what you need to know:

Being unable to make car payments can be just as damaging to credit scores as being unable to make house payments. Late payments will give you a black mark, and a car repossession will stay on your credit score for 7 years. That will make it difficult, if not impossible, to get another car loan after you’ve gotten back to work and can once again afford the payments.

Before you give up and let the bank take the car, contact your lender and discuss having your loan modified. You may be able to extend the payment period in order to lower the payments to a manageable level.

If that won’t work, or if you feel you can’t make any payments at this time, try to sell the car yourself. Even if you have to come up with a few hundred dollars to make up the difference between the selling price and what you owe, you’ll save your credit scores.

Plus, the difference you’ll need to pay will be less than the difference you might have to pay if your lender repossesses the car. You see, lenders sell cars at auction, and auctions bring less than a private sale. And, you’ll be held responsible to make up the difference.

If you can’t negotiate a longer loan term and can’t find a buyer for the car, consider a voluntary repossession. This will give you the opportunity to negotiate with your lender to reduce or eliminate the shortage you’ll be required to pay. In addition, surrendering a car makes lenders view you in a more positive light, so you may be able to purchase another car sooner.

Do keep in mind that even if your lender forgives a portion of your debt, you’ll need to pay income tax on the forgiven amount. The government considers such forgiveness a monetary gift, and they want their share!

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Disclaimer: This information has been compiled and provided by as an informational service to the public. While our goal is to provide information that will help consumers to manage their credit and debt, this information should not be considered legal advice. Such advice must be specific to the various circumstances of each person's situation, and the general information provided on these pages should not be used as a substitute for the advice of competent legal counsel.