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The Pros and Cons of Auto Loan Debt Restructuring Programs

By Spodek Law Group | February 20, 2024

The Pros and Cons of Auto Loan Debt Restructuring Programs

Dealing with overwhelming auto loan debt can feel scary and confusing. I totally get it – trying to navigate your options and figure out the best path forward is really tough. Just know there are solutions out there that can help, like auto loan debt restructuring programs. I wanted to give a quick rundown on the pros and cons of these programs, in case it could provide some useful info.

What is Auto Loan Debt Restructuring?

Auto loan debt restructuring basically means adjusting the terms of your existing car loan to make it more manageable for your financial situation. This could mean things like:

  • Lowering your interest rate to save money on finance charges each month
  • Extending your repayment timeline so you have smaller monthly payments
  • Adding in a period where you only pay interest, no principal, to help free up cash flow
  • Rolling in missed payments to the end of your loan term

The goal is to reshape your loan so it works with your budget instead of drowning you.

The Potential Benefits

There are a few key benefits that make auto loan debt restructuring appealing:

    1. Making payments more affordable

This is huge. Lower interest rates, smaller monthly payments, waived fees – all of these changes give you some much-needed breathing room when money is tight. It makes keeping up with your bills less stressful.

    1. Avoiding repossession

If the modified payment plan fits your budget better, it means you’re less likely to default on your loan. No defaults = your car stays safely with you.

    1. Improving your credit

Getting an auto loan restructured can actually help rebuild your credit if you make all the revised payments on time. It shows you’re committed to paying what you owe.

    1. Paying less interest over time

Refinancing to a lower interest rate, or moving missed payments to the end of your term, cuts down the total interest fees you pay over the life of your loan. More money in your pocket.

Potential Downsides to Understand

Of course, auto loan restructuring plans aren’t perfect. There are a few key downsides to consider:

    1. Credit score impacts

While restructuring can help improve your credit long-term, it may ding your credit score a bit initially. Defaulted payments stay on your history.

    1. Higher total repayment costs

If you extend your loan term, you may wind up paying more overall by the end of your repayment timeline. Make sure to run the numbers.

    1. Equity issues

If you owe more than your car is currently worth after restructuring, you may end up upside-down on your loan if you want to sell or trade in your vehicle. Gap insurance can help protect against this.

    1. Fees involved

Many lenders charge fees to restructure, refinance, or modify a loan. Make sure to account for these costs in your decision-making process – a few hundred dollars here and there adds up.

    1. Qualification challenges

You usually need fairly good credit and income to qualify for most auto loan restructuring programs. It’s not an option for everyone struggling with car loan debt.

Key Tips for Restructuring Your Auto Loan

If you decide auto loan restructuring could be a good fit for your situation, here are a few tips to make the process smoother:

  • Shop around – Rates, terms, and options vary between lenders. Compare offers from banks, credit unions, online lenders, and your current financing company.
  • Read the fine print – Make sure to understand any fees, impacts to your loan’s equity, changes to insurance requirements, and other key details before signing. Don’t gloss over the small print.
  • Consider refinancing – If your credit has improved significantly since you originated your loan, refinancing with another lender may get you better terms than restructuring.
  • Talk to other creditors – Consider requesting temporary hardship programs from credit card companies, mortgage lenders etc. while you get back on your feet.
  • Pay more than the minimum – If possible, paying extra each month helps you pay off the principal faster and spend less on interest.
  • Start rebuilding credit – Use secured cards or credit builder loans to continue improving your score over time. This expands your options.

The r/personalfinance community on Reddit is another great place to get feedback and advice from others who have gone through the auto loan restructuring process if you’re weighing your choices.

The Bottom Line

Dealing with overwhelming auto loan debt is stressful, but restructuring your problem car loan to more affordable monthly payments, interest rates, and terms can be an effective option to make it workable for your budget. It can help you hold onto your ability to drive while also improving your credit.

Just make sure to watch out for higher total repayment costs over time, dings to your credit, fees, and other key downsides. Do your homework, understand the terms, run the numbers for total costs, and compare multiple lenders to find the best auto loan restructuring program for your unique situation.

With the right restructured loan, you can breathe easier each month knowing you have an affordable path to eventually paying off your car. It can be a huge weight lifted off your financial shoulders.

I hope this overview on the pros and cons gives you a helpful starting point for navigating your options and deciding if auto loan debt restructuring is the right move for you. Let me know if any other questions come up!

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