June 10, 2015 – By Ellen Chang
Consumers who are facing delinquent car or mortgage payments should start by negotiating with their lender instead of ignoring the problem.
Dealing with the lenders head-on when you know a late payment is imminent will help you in the long-run, because they will be more willing to work with you and offer a variety of payment options. This can be one way to salvage your credit score. If you are coping with a budget crunch or if the unemployment checks have nearly run out, start addressing the issue of having to skip a payment.
The worst thing consumers can do is disregard the issue entirely and believe they can start making payments on their delinquent account once they start earning a salary. Depending on your lender and if you routinely pay on time, the company might have a grace period of a week before incurring a late fee or will reverse it, said Leslie Tayne, a Melville, N.Y. attorney specializing in debt relief.
Some companies allow borrowers to qualify for a forbearance, which provides temporary relief from your full payment or to skip a couple of payments, said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.-based nonprofit organization.
“You never know if you qualify for these or other options unless you take the first step and call the lender before things get worse,” he said.
Auto Lenders Are Less Forgiving
Many lenders are less merciful when it comes to missing a car payment and repossession is more likely to be on the table.
Some lenders will repossess the vehicle “as soon as a payment is missed in some cases,” said McClary. Discuss your options with the lender to avoid further delinquency. Some lenders will want to avoid the extra work and expense of repossessing your car and might allow consumers to skip or defer a payment, he said. Don’t count on it and call them to see if it is a viable option. Others might be more lenient and can offer to change the terms or refinance the loan for more affordable payments.
“If those actions don’t look possible, you can try to sell the car or turn in the keys for a voluntary repossession,” McClary said.
Car Loan Payment Options
Consumers who believe it is just a temporary setback might be able to skip a payment or make lower ones for a few months. The lender will want you to add the missing amounts at the end of the loan.
Refinancing your current auto loan might be worth it if you need to save more money in the long term, said Kevin Gallegos, vice president of the Phoenix operations for Freedom Financial Network, a consumer debt resolution company. This means you would wind up with a lower interest rate or a longer loan term, so start by asking your current lender.
Selling your car might seem like a worst case scenario, but it means you will have the flexibility of having extra cash to pay bills, especially your rent or mortgage or the option to buy a cheaper car.
First, do some research, and find out if it’s worth selling. Determine how much you owe on the car and see if you can sell the car for more than the amount of your existing loan.
“You would be able to pay off the bank, maintain your credit profile and hopefully have enough cash to purchase a less expensive car,” he said.
Once you have hit 90 days of not making any kind of a payment, the lender will definitely send your account to collections and the car will be repossessed, said Katie Ross, education and development manager for American Consumer Credit Counseling, an Auburndale, Mass.-based financial education nonprofit organization.
If you run into financial trouble, it is crucial to explain your situation to the lender.
“If the situation is dire, a bank may even allow a buyer to miss a payment or two while things get better,” said Matt Jones, a senior editor for Edmunds.com, a Santa Monica, Calif.-based car shopping website.
Missing Mortgage Payments
Mortgage lenders tend to be more tolerant if you miss one or two payments and the timeline for a foreclosure is longer.
Missing a second payment makes your situation even more dire. While a foreclosure typically cannot start until your mortgage is at least 120 days past due, it is a serious problem, said McClary.
Since most lenders require homeowners to make a payment by the first a month, a grace period is usually only given until the 15 of the month. Once you have surpassed that date, your payment will be considered delinquent, said Kevin Gallegos, vice president of the Phoenix operations with Freedom Financial Network, a company that helps consumers with debt issues.
The good news is that the majority of lenders will not report that the payment is late to the three credit bureaus until it has been 30 days late. Your credit score can be “hit hard and sometimes up to 100 points for just one missed payment,” he said.
Mortgage Payment Options
If you know your situation is just temporary, the lender may be willing to work with you on a payment plan, Gallegos said. Some homeowners will seek a forbearance agreement for a temporary hardship, and it will grant a homeowner the option to lower or eliminate payments for a “limited time,” he said.
Loan modifications are a permanent change to the terms of the loan and will lower the payment by extending the loan’s term or incorporate the delinquencies into future payments.
By the time you have missed a couple of payments, refinancing might not be a viable option. Lenders will likely only give you a higher interest rate, which means it will not lower the monthly payment.
Free Counseling Programs
Before you head into a potential foreclosure, one option is to seek free advice from a Housing & Urban Development-approved housing counseling agency, said McClary. These nonprofit agencies can help identify “sustainable ways to preserve home ownership or transition to more affordable housing while avoiding foreclosure,” he said.
There are also two federal government programs whose goals are to help struggling homeowners and were founded in the aftermath of the 2008 housing market crash and global financial crisis. The Home Affordable Modification Program (HAMP) assists homeowners who are in danger of a foreclosure and will help them refinance their mortgages to lower their monthly payments. The second, known as the Home Affordable Refinance Program (HARP), helps homeowners who have loans owned by Fannie Mae or Freddie Mac and have not missed any payments yet, but do not have much equity in their home or owe more on their mortgage than the home’s current value.