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Guide to Car Loan Modification

What Is a Car Loan Modification?
Austin Kilham
Austin KilhamUpdated April 3, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you experience some kind of financial hardship—you face an unexpected medical bill or you lose your job, for example—you may find it difficult to continue meeting your financial responsibilities, including your auto loan, in an inflation-plagued economy.A loan modification may provide some relief, giving you a chance to get back on your feet or make your monthly payments more manageable. Learn more about how this option can help you keep your car and protect your credit. 

Can I Change a Car Loan Contract?

If it looks like you’re in a position where you will be unable to pay your auto loan bill, some lenders may allow you to modify your loan. After all, they want to recoup the amount they’ve lent and continue collecting interest. Modifying your loan means changing the terms in your loan contract. It may entail lowering your interest rate, changing your monthly payment, moving your payment due date to better work with your budget, or even defer payment for a short amount of time until you are more financially stable. 

When to Consider a Car Loan Modification 

If you don’t think you’ll be able to make your auto loan payments, due to a financial emergency, or you’ve lost your job, it may be worth reaching out to your lender to see if they offer automobile loan modification. Doing so will help protect your credit score. Missing payments may lead to penalties and will damage your score, making it more difficult and expensive to secure credit in the future. Missed payments may also lead your lender to repossess your car, at which point they’ll sell it to make back the money you owe on your loan. Repossession can further damage your credit score, leaving a derogatory mark on your credit history for seven years.  There are other times you might consider an automobile loan modification. For example, if your car is worth much less than the amount you owe on your loan — a situation known as being underwater or upside down on your loan — you may qualify for modification. 

How to Get a Car Loan Modification

Reach out to your lender immediately if you’re in danger of missing a payment. Tell them about your situation and ask them what your options are. If auto loan modification is an option through your lender, they will likely require you to pull together documentation regarding the reasons you won’t be able to pay your loan. You may need to provide a hardship letter that explains and documents the specific reason you need to modify your loan, such as medical bills or job loss. Once you submit the documentation, your lender will then let you know what types of modification they can offer. Even while applying for an auto loan modification, continue paying as much as you can toward your loan.Unfortunately, repossession can still take place while you’re waiting for a loan modification decision to be made. You may want to ask your lender to notify the repossession team that you’re seeking modification and doing what you can to get back on track with your loan. Recommended: Avoid Loan Modification Scams

Pros and Cons of Changing Your Car Loan Contract

As you decide whether loan modification is the right strategy for you, it’s important to weigh the advantages and disadvantages. On the positive side, loan modification helps you realign your loan payments with your current budget. Doing so can help you avoid missing payments, which would have a detrimental effect on your credit score and could ultimately lead to your car being repossessed. On the other hand, the process of loan modification can be relatively slow, requiring time for you to gather documentation and for your lender to deliberate. In the meantime, you may end up missing payments or repossession may take place. Here are the pros and cons of loan modification at a glance:
Helps align your loan payments with your current budget.Process can be slow. 
Helps avoid missing payments that would hurt your credit score. While your lender is deliberating, you may end up missing payments.
Staying current on car payments helps you avoid repossession.Repossession can still occur while the lender is processing your loan modification request.

Alternatives to Car Loan Modification

As you explore loan modification as an option, and even if you’re already applied, you may want to consider other alternatives. 

Sell Your Car

If your car loan has become unmanageable, you may consider selling your vehicle, especially if other viable transportation options are available. Use the proceeds from the sale to pay off your loan early. But understand that if your loan was upside down, money from the sale won’t cover the whole thing. You’ll need to come up with other solutions to make up the difference. 

Auto Loan Settlement

And auto loan settlement allows you to negotiate with your lender to settle your loan for less than the amount previously agreed upon. This is usually a measure of last resort as a settlement will damage your credit score, and a settled account will stay on your credit report for seven years. That said, repossession is more damaging, so if settlement is the only option left, it may be worth considering. 

Refinancing Your Loan

When you refinance your auto loan, you take out a new loan to pay off your previous loan. Ideally this new loan will have a lower interest rate that helps reduce your monthly payment. You might also take the opportunity to lengthen your loan term, which will lower your monthly payment but ultimately increase the amount of interest you pay over the life of the loan. When should or shouldn’t you refinance a car loan? Your credit score is an important factor in determining the interest a lender will offer you. So you may want to consider refinancings when your credit score has improved or interest rates have declined. Reach out to your lender to ask about refinancing, and shop around to others to ensure you secure the best rates and terms. Recommended: Guide to Finalized Car Loans

The Takeaway

When times are tough financially, seeking loan modification is a proactive way to protect your credit and keep your car. While exploring these options, consider other ways to manage your monthly payments, including refinancing your auto loan. Learn more at Lantern by SoFi

Frequently Asked Questions

What is a loan modification for a car loan?
Does a car loan modification hurt your credit?
Is It hard to get approval for a loan modification?
Photo credit: iStock/baona

About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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