Loan modifications have been around as long as there have been car loans. They have become more popular now because Banks and Finance companies have determined there is no other way to resolve their financial problems caused by the huge volume of delinquent borrowers and bad loans. This is good news. It means that we can all look forward to increased options with workout programs and full loan modifications. Loan Modifications are basically where Banks and borrowers work together to find common ground that is mutually beneficial, meaning borrowers keep their vehicle and the lender or bank stays in business.
Car repossessions are at an all time high. According to recent data search, Auto Repossessions reached a 10 year high in 2008 with 1.67 million total auto repossessions. Analysts are projecting the once all the research is in 2009 will have seen another 10% increase from 2008. That is almost 2 million auto repossessions in 1 year. With the state of the economy and employment market, these numbers will likely increase over the next several years.
The reality is, consumers need help. There are programs to assist with Mortgage or Credit Card debt, but very few exist for assistance for those who have trouble making their vehicle payments. There are various reasons that people fall behind in their payments from job loss, disability, divorce or the fact that sometime there is more month than there is money. In other words, after the mortgage or rent payment and other necessities, there may not be enough money to make the car payment.
So how did we get here? Remember, one of the main reasons why so many people got into trouble with Real Estate and housing is because of the ease of obtaining money. Lenders made it easy to buy real estate with little or no money down without having to prove much in the way of assets or income. This in turn caused may people to buy houses they did not need or could not afford. The difference then was many people were able to bail themselves out by refinancing their house and deferring payments. There is a connection here that most have not made over the last few years. Because of the unique mortgage programs that allowed consumers to have inexpensive payments on larger homes, the excess typically was used to buy depreciating or non performing assets. Often times this resulted in more expensive cars and toys like boats and RV’s. The problem is this mentality still exists today. Finance companies have made it easy to borrow money for large dollar vehicle purchases. It seems very unrealistic that a family with an annual combined income of less 50k would have vehicle payments exceeding 20% of the gross monthly income. However, this is very common. Combine the rent or mortgage payment in addition to the other standard monthly expenses and it is easy to see what a small change in the economy or employment market can do to upset the financial apple cart.
Understanding the backdrop of the problem is critical to providing a solution. Finance companies will continue to make it easy to borrow money, which is what keeps the system money flow working in this country. This means that consumers will continue to have challenges with debt, specifically vehicle payments. With this in mind, what are options do consumers have if they face delinquency or repossession?
Modifying a vehicle payment is easier than most people may think. Many consumers do not realize the amount of information that is available to assist them if they need to modify their payments. Step by step instruction is available for those who:
*Have fallen behind on their loan payment
*Have lost value on their Auto, Motorcycle, Boat, and RV
*Are not behind but have difficulties or may have difficulties paying their payments.
Additionally, this relief is available for:
As with President Obama’s save your home program more attention is being given to Vehicle Loan Modifications. The Government and Lending institutions understand that loan modifications will continue to play a critical part of our Economic Recovery. Although there are no current programs to help bail banks out for providing Auto Loan Modifications, finance companies realize they are a necessity. These institutions have companies like Avertrepo.com working diligently in their behalf to help get repossessions under control.
Just as many people do not want to have repossession, believe it or not the bank does not want one either. Later we will discuss in more detail the importance of opening the lines of communication with the lender. It is critical to get in touch with the lender sooner rather than later. So now that you understand the landscape, what can be done? The answers are easier than you think!
For those considering or are in need of a vehicle modification, here are some basic options that are available:
Partial relief. Partial relief is when a lender takes late payments and adds it to the end of the loan. This is very popular because it can provide immediate relief for those who are behind in their payments.
Payment relief. Payment relief is when the lender allows the borrower to skip a payment, pay a partial payment the 2nd month and a partial payment the 3rd month. On month 4, the borrower will start fresh. This is a good option to help borrowers get back on their feet. For most people skipping a payment or two can provide a huge relief.
Full Auto Loan Modification. A full modification can result in a possible principle reduction, interest rate drop or extended length of term. This simple step can save a consumer thousands over the life of their loan.
Finance companies will approve auto loan modifications for a number of reasons. Each will have their own unique way of handling modifications. All seem to deal with borrowers on a case by case bases. That means just because Ford Motor Credit gave you a Principle Reduction, it does not mean that someone in California will get the same modification even if the loan is with Ford Motor Credit. Whatever the hardship that has led to the delinquency, coupled with your loan balance, auto’s value and your interest rate will all be major keys in being able to get a loan modification. One or more of the following circumstances will make it possible to allow an auto modification:
* The interest rate is too high and payments cannot be made
* Payments cannot be made because of a financial hardship (Loss of job, sickness in the family, car broke down) ect.
* It is discovered through a value assessment and found you are upside down on your vehicles value.
A loan Modification approval must be given by a bank. This means they will ultimately make the decision. Each borrower has different circumstances that will factor in on how a bank will respond. If a consumer is pursing a modification, it is very important to understand that they DO NOT want your bank to think that they cannot afford their vehicle or loan. The bank needs to know that the loan is not affordable it at the current interest rate or principle balance. Currently, no real standards exist for qualifications and guidelines for a loan modification. Each lender decides when and how they will deal with a borrower’s situation. Following these simple steps can make it easier for the lender to make a positive decision in the borrowers favor.
When a borrower needs to modify, they must also understand the time line. This provides a realistic idea of how long it should take to accomplish payment relief. The auto loan modification process depends on how fast the requested information is sent to the bank. However, the most important factor is the accuracy and completeness of the modification package. With consistent follow up, he process should be complete in less than 30 days. Banks, in most cases, are motivated by the fact that contact is made by the borrower. Loan modifications can be done in as little as 7 days. As discusses, a loan modification is typically the best option for consumer and for the finance company when there are delinquent payments or a hardship issue.
Working with the bank to modify a vehicle loan can result in one of several choices and options. Some are comfortable with the terms of the vehicle, but just need a lower monthly payment. Others need to reduce the term of the loan in order to pay it off sooner. However, in most cases, because a vehicle represents one of the largest depreciating assets, may need a principle loan reduction in order to feel comfortable making payments on a vehicle that actually has value. Here are the three focus areas:
Interest Rate Reduction. This is what a bank charges for the use of their money. An interest rate modification is the most common modification. It is usually the most effective method for the borrower and the bank. We suggest you request 2.5 to 4.5% interest rate reduction regardless of your current rate. Remember, a repossession cost a bank on average $8,000.00 per repossession! So even if they dropped the interest rate to 0% and the borrower only paid them back the principle balance, they didn’t lose money. Although the loan amount does not change, this will result in having a lower payment.
Term. The term of the loan is how long the bank agrees to give the borrower to pay back the borrowed money. Extending the term is also popular with banks. If the borrower were given 72 months to pay the loan back that has been current for the previous 24 months, the lender could extend the term back to 72 months. This will immediately result in a lower payment.
Principle Reduction. The principle balance is the amount of money you owed to the bank. This does not include interest or any fees. A principle balance reduction is the toughest modification to get from the bank, but it can be done. Although it may be less common, it can be approved under the right circumstances. This is an important reason to get an appraisal report done on the vehicle. FREE sites like www.NADA.com or www.NADA.com can be used to find the value. To get a more accurate value, visiting two local dealerships may make sense. They can provide an on site vehicle value report. This is will be very important in the documentation section discussed later. It is suggested to ask for a reduction down to 90% of the current vehicle value. So, if the vehicle is worth $20,000.00 asking your lender to drop the principle balance or reduce the principle balance down to $18,000.00. This has nothing to do with what is owed. This is determined by real market value. In effect, if $22,000.00 is owed and the value is $20,000.00, asking the bank for a principle reduction of $4,000.00 would be reasonable.
As previously discussed, a modification applies to ALL vehicles. When considering a modification for a specific situation, all relevant factors into consideration. This includes how much is owed, how much is affordable, the overall monthly budget, and the ability to create a hardship to the finance company, etc. It is very important that the time is taken to gather all necessary documents and submit them to the lender in the appropriate manner. This will expedite the process and in some cases it is possible to modify in less that 48 hours! Remember, banks want to talk to work with consumers and do not want to repossess anyone’s automobile, if possible. However, in order for this to work, the appropriate must take action.
You can learn more about stopping repossession and lowering payments, as well as receive free consumer manuals with the latest negotiating techniques at: www.stopreposnow.com.
About the Author
William has over 15 years in Consumer Finance experience and has co-authored several consumer do-it-yourself manuals. Through his efforts, he is committed to helping consumers understand effective methods for negotiating their consumer debt. You can learn about his research at: www.30minutelowerloanpayments.com