Reduce Your Car Payments Without Getting a Refinancing Loan

It is not uncommon for car-buyers to become trapped in what can seem like an unsustainable car payment. The reasons for this are numerous and can include high interest rates, poor credit, a minimal down-payment, or purchasing from a "buy here, pay here" dealer who extends unfavorable or predatory terms. Couple these conditions with financial hardship such as a job-loss, medical situation, or unexpected bills, and default becomes a possibility. This situation often becomes more complex if the buyer has insufficient credit for refinancing, or the conditions aren't favorable. In this case, the only option available without refinancing is car-loan modification, which often occurs via the use of financial hardship assistance programs with your lender.


Part 1: Understanding Car Loan Modification

  1. Learn what car loan modification is. If you are late or missing car payments, loan modification is an option to avoid repossession of the vehicle. Loan modification is similar to refinancing, but occurs under distressed conditions, and usually involves a change in existing terms to make the loan more affordable.[1]
    • Loan modification can involve several different changes to your loan. This could include a lowering of your interest-rate, an extension of your term (which lowers your monthly payment, but would result in you paying for a longer period and therefore more interest over time). It can also include forbearance -- which refers to making little to no payments for a very specific period of time -- or various other options.
    • Every lender has a different approach to loan modification. Some lenders do not permit it at all, whereas some lenders have official financial hardship programs for borrowers with difficulty repaying. Toronto-Dominion Bank, for example, has a "loan repayment solutions" program, which offers distressed borrowers individualized plans that can include modification, forbearance, or several other options.[2]
  2. Learn the difference between loan modification and loan refinancing. Keep in mind that modification and refinancing are very different. Refinancing refers replacing an existing loan with a new loan that has a lower rate, or more favorable terms. A modification refers to taking the existing loan and adjusting the terms, often for a short-time, for borrowers who are in a distressed condition. For individuals with poor credit, refinancing may not be an option, making modification a better choice.
    • Lenders are often open to modification because repossessing a car is not a favorable option for the lender. When a car is repossessed, there can often be significant costs involved in preparing for resale. It is often a simpler option for a bank to simply restructure the loan.
    • Another key difference between loan modification and loan refinancing is that refinancing is a permanent solution, whereas modification is often temporary until what hardship lead to the modification is relieved. If you suffer a job loss for example, you may be permitted to make reduced payments until you are employed once again.
  3. Determine if car loan modification is right for you. The process of modifying a car loan can be difficult and time consuming, therefore, its important to make sure it is the right option for you.
    • If your car loan is underwater or "upside-down" you may qualify. This means your debt is worth more than the car itself, which would leave outstanding debt if the car was sold. Modification can help correct this
    • If you had an accident or other incident that reduced your car value significantly, modification can also be the right option.
    • If you suffered a job loss or income reduction and are having difficulties making payments, a loan modification can also correct this.
    • If you are in any situation where a default is a likely option, modification should always be explored as a way to reduce payments, as the lender would rather explore options than default.
  4. Determine if you qualify for loan modification. Generally, in order to receive any type of loan modification or hardship assistance, you will need to demonstrate you qualify before applying. Usually, qualification depends on several factors.[3]
    • It is important to have a decent track record of honestly trying to repay debt. If you have a positive track record of making an effort to repay debt and working with the lender, they are more likely to assist you in a modification.
    • Demonstrate that unforeseen circumstances lead to your inability to pay. This can include a job loss, divorce, medical emergency, or any factor beyond your control. Poor budgeting will often not suffice as a reason, but if your financial situation is such that you cannot afford to live while making payments, it is worth approaching the lender.

Part 2: Applying For Car Loan Modification

  1. Calculate your debt-to-income ratio (DIR). This is an important preparation step, as it allows you to determine how in debt you actually are, and if modification is likely to be accepted.
    • The DIR is simply the ratio of your monthly debt payments to your monthly income. To calculate it, divide your monthly debt payments by your income. For example, if you pay $1000 a month to various forms of debt, and your income is $1500, you would have a very high DIR of 60%. Between 30-40% is considered reasonable.
  2. Contact your lender. Look online or call your lender to check if your lender has an official financial hardship or loan modification program. If they do, simply follow the instructions to proceed.
    • If your lender does not have a specific program, call them and explain your situation. Make it clear that you are unable to continue making payments under the current arrangement, and that you are worried about being at risk of default. The lender will then inform you if loan modification or assistance is an option, or if the lender simply does not provide that service. Most lenders will be receptive, since defaulting is not a favorable option for them either.
    • Make it clear to the lender that you want to pay the loan. Let them know your intention is to pay the loan in full, and that with some mild assistance, it is possible. [4]
  3. Prepare the required documentation. Just because the lender agrees to the idea does not mean the process is over -- it is now necessary to prove your financial hardship is viable.
    • The lender will likely request several documents. Be prepared to include paystubs, phone bills, utility bills, bank statements, or even notarized letters
  4. Write a hardship letter. The hardship letter (sometimes referred to as a request for assistance) will usually be required, but if it is not, it is always a good idea to submit one anyway. This letter will outline why your car payment is unaffordable, and why your income is reduced and your expenses are increased.[3]
    • Be sure to include the specific reasons as to why you are requesting a modification. Refer to Part 1, Step 3 above, and make sure that you demonstrate clearly that you have been making honest efforts to repay, that you have been afflicted by some unforeseen circumstance beyond your control (job loss, income reduction, medical expenses, illness, divorce, unexpected expenses, death of a family member), and that the current circumstance is likely to last more than a few months. Be honest, and do not be afraid to include numbers confirming your income reduction.
    • Provide a specific request for new terms. This could include the precise amount you can afford to pay each month, an end date for the new reduced payment. Think about how much you can afford, and for how long, and make sure to specify this. Being too open can lead to unfavorable terms being extended.[4]
  5. Submit your documentation and wait for a response. After the application is complete, you can simply wait to hear back from the lender. If possible, still try and make payments during this period. Often repossessions can occur while waiting for approval, so make sure that the individuals responsible for the modification are communicating with the repossession team to ensure they are aware of the process.
  6. Responding to the lender's offer. The lender may offer several different options depending on what they have available to them, and your particular situation. This may include lower interest rates, reduced payments for a short-term until whatever difficult you have ends, or adding missed payments to the back of your loan.
    • If the new terms the lender offers will not decrease your odds of a default, make this very clear. However, if you are clear in your hardship letter about exactly what you need and what you can afford, it reduces the odds the lender will come back with something unfavorable.
  7. Make sure that you restructure your own personal budget after the agreement is signed. This will further help you in improving your finances, especially when the hardship plan is temporary.
    • Although modification of a loan can be a stressful and time consuming process, by sticking to the new terms and restructuring your personal budget to give loan repayments top priority, it is very possible to both keep your vehicle, and begin the process of improving your credit.


  • Be prepared for the possibility of losing the first negotiation with the lender. If this is the case, try to request for a supervisor to get involved in the negotiation.

Sources and Citations