What to do when you fall behind on your car repayments

Lindi wrote to City Press because she had fallen behind on her car repayments to BMW Finance. She wanted to find out if she could give the car back to the financial institution and what the implications would be on her credit profile.

By the time City Press received the query, BMW Finance had already proceeded with action to take judgment against Lindi.

City Press asked Paul Slot, CEO of debt counselling firm Octogen, to see if the company could come to an agreement with BMW Finance on Lindi’s behalf.

Because BMW Finance had already commenced with legal action, Lindi could not apply for debt review, but BMW Finance agreed to a request by Octogen to halt legal proceedings if Lindi returned the vehicle.

Slot says: “The bottom line is Lindi has no funds available to catch up the arrears or maintain payments. In addition, the credit agreement included a hefty residual value, which makes it impossible to sell the vehicle for the outstanding balance.”

Slot explained to Lindi the only option available to her was to hand back the vehicle and take out a loan to meet the shortfall.

The problem was that Lindi ran out of options because she didn’t seek advice early enough – she only took action once she was faced with a legal threat.

By taking action sooner, Lindi could have:

. Negotiated an extended repayment period;

. Sold the car privately, and probably would have received a higher value than she is likely to through a forced auction; or

. Applied for debt review.

Negotiating with the bank

Rudolf Mahoney, head of research and public relations at WesBank, says typically there are two reasons a person falls behind on car payments – either their expenses are increasing or their income has been affected by a retrenchment or job loss.

In a case where a client is facing a short-term financial squeeze, one can make an arrangement to pay a reduced instalment for a couple of months and, once expenses fall back in line, the client can repay the arrears that have accumulated over an agreed number of months.

“Wesbank even has this function on its online self-service portal, so the customer doesn’t even have to call the bank,” says Mahoney.

“If the problem is over a longer term, such as overextending credit, then the client can consider trading in the car for something more affordable or, if that is not an option, the client can opt to apply for debt review.

“If the account has been running for a few years, the client can ask for the loan term to be extended, and the consumer must contact the bank to understand if they qualify for this option.

“As a last resort, the client can voluntarily hand the car back to the bank so the bank can auction the vehicle,” says Mahoney, who adds that the golden rule is to contact your bank well before the account falls into arrears.

“Clients must not be embarrassed to do this – it is simply a business transaction that is not going according to plan,” he says.

In the case where a client has lost his or her income altogether, the bank will allow the client to stop payments for a month or two in the hope that he or she will find employment again.

One should also immediately find out if you have credit insurance, which covers retrenchment. In such a case, repayments would be covered for a period of six months.

Opting for debt review

If you have reached a point where you genuinely cannot afford to meet your repayments (such as if you have already cut back on luxuries such as DStv), debt review could help you keep the car.

Ian Wason of DebtBusters says the total amount owed, including residual payments, is used and extended over up to 84 months.

“We then have mandates from the credit providers to reduce their interest rates to as low as 7.75%, so it can make a huge difference in terms of monthly affordability and large savings in interest, and it means there is no residual at the end of it,” says Wason.

Slot says, depending on the repayment amount available, the credit provider will waive the monthly fee of R57 and the interest rate can reduce to the repo rate plus 2%.

For example, if you purchase a vehicle for R300 000 with a 25% residual value (R75 000) and apply for debt review, the fees and interest rate concessions can reduce your repayment by 20%.

1. Don’t wait for the credit provider to take action. Contact the provider before you fall behind and ask for an extension on the repayment term. Positive results are not guaranteed, but when you’re not in arrears you increase your chances of a positive outcome.

2. Don’t take on more debt to repay the arrears on your vehicle. By doing this, you just postpone the pain. The fact is that, in 90% of cases, extra debt buys you a few months before a bigger problem needs to be solved.

3. Don’t take a payday loan to repay debt. Not only is this debt expensive, it does not solve your cash-flow problem.

4. Don’t stop payments, do nothing and wait for the credit provider to take legal action. The provider will obtain a judgment, repossess the vehicle and sell it for next to nothing – leaving you with a higher balance to repay.

5. Don’t keep the fact that you cannot pay from your spouse. Discuss your financial predicament as soon as possible. In most cases, early discussion leads to a useful solution.

6. Don’t stop your vehicle insurance when you are in financial trouble. Not only are you in breach of your credit agreement, you also increase your risk profile with no insurance.

. Information provided by Octogen

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