As we approach a full year since COVID-19 lockdowns began, the unemployment rate is still far from rebounding to pre-pandemic levels. If you're one of the millions of Americans who lost their job due to the pandemic or you've suffered other hardships since you purchased your vehicle, making your car payments is likely adding fuel to the fire of financial stress. Preventing delinquency and avoiding vehicle repossession is possible, even during these tough times. As you consider your options, it's important to understand the auto loan modification process and beware of scams. We cover what auto loan modification is, the pros and cons, and what to do if you're struggling to make car payments.

What is Auto Loan Modification?

Auto loan modification
Auto modification could be a solution when car payments become unmanageable. 

A loan modification is most common for mortgages, but it's possible to modify other types of loans including personal, student, and auto loans. A loan modification is the process of changing the terms of a loan to reduce the payments and take some financial burden off the borrower. In the case of a mortgage, this allows the homeowner to avoid foreclosure, and for auto loans, it can prevent vehicle repossession.

Beware of Auto Loan Modification Scams

Auto loan modification can be done directly through some banks and auto lenders, but what about third-party companies that claim they can modify your auto loan to lower your payments? You want to be wary of the latter. According to the Federal Trade Commission, these companies promise to help you avoid repossession by working with your lender to lower your payment. The company charges a hefty fee for the service but offers little or nothing in return.

The FTC warns consumers: "The victims of these auto loan modification scams tell the same story: After paying a fee for the promise of a loan modification, nothing was done to secure the results that were promised. The scam artists often compounded the problem by telling their clients to stop making their car payments while the companies claimed to be in negotiations with lenders. Some victims learned that the companies hadn't done anything only after their lender contacted them about repossessing their vehicle."

Pros and Cons of Auto Loan Modification

loan modification concept

Working directly with your lender to modify your auto loan could have some advantages, at least in the short-term. According to U.S. News and World Report, a loan modification done through a lender takes some of the burden off the borrower by lowering monthly payments and halting collection activity. A loan modification can reduce interest rates or extend the loan term which reduces the monthly payments and helps prevent vehicle repossession. 

Even if you go directly through your lender and avoid third-party companies, there are still some risks involved with modifying an auto loan. The process can increase the cost of the overall auto loan since the total interest will likely go up.  Auto loan modification can also have a negative impact on your credit score. U.S. News warns that a modification can leave a derogatory remark like "paying by modified terms" on your credit report. Luckily, getting back on track with payments will mitigate some of this risk by raising your credit score.

What To Do if You Can’t Make Your Car Payments

Man on the phone with auto lender

If you're worried about falling behind on your car payments, or if you have already missed a payment, the first step is to contact your lender. Call your bank or lending company and explain the situation as soon as possible (ideally before skipping a payment). There's a chance a formal auto loan modification won't be necessary, and the lender will work with you to find a short-term solution until you're able to make regular payments again.  

Many auto lenders have set up special hotlines and are offering assistance during the COVID-19 pandemic. You can request several options when you speak with your lender including changing the date when payment is due, requesting a payment plan, or asking for a payment extension and deferral which has become widely available during the pandemic. 

Refinancing vs. Auto Loan Modification

refinance auto loan

Refinancing your car loan is another alternative to auto loan modification. Refinancing allows you to shop around for a better interest rate or extend the loan terms for a lower monthly payment. There are a few caveats to the benefits of auto refinancing, however. Because the process involves taking out a new loan to pay off the existing one, it only makes sense to refinance if your credit score has improved since the original loan origination or if auto loan rates have dropped. If neither scenario has occurred and you're simply struggling to keep up with your payments, auto loan modification is the preferred route.