As lockdown drags on and job cuts continue, more and more people are facing financial difficulty when it comes to paying off debt. Many people have asked for advice about what they should do if they cannot afford their car payments.

The bottom line is that you must start  by having a conversation with the bank – sooner rather than later.

Michael had lost his job and realised that he could no longer afford his car payments. He took the drastic step of selling the vehicle, but he had a shortfall on what he still owed. We recommended he speak to Nedbank’s car finance division MFC, which had financed his car, to discuss his options.

He had a lump sum of R50 000 which he could use to settle a portion of the R65 000 shortfall. The bank agreed to accept that as full and final settlement.

If you cannot afford the car, the worst thing you can do is miss payments without reaching out to the bank.

Neeyna recently lost her job and after paying her car instalments for five years, she still had an outstanding amount of R51 000. She had R40 000 available to settle the outstanding amount.

This is a different situation from Michael’s, as Neeyna still had the asset and technically could sell the car to cover the shortfall. However, banks are seeing the Covid-19 pandemic as exceptional circumstances and are more willing to come to an agreement that keeps the client in their car. But it all depends on the client’s history with the bank and their payment history.

As Neeyna had never missed a payment and was in good standing, the bank was more willing to come to a favourable agreement.

“There is a cost to repossessing a car. There are legal costs, and it takes time. If a client is willing to negotiate and pay something towards the car, then we are willing to come to an agreement,” says Faisal Mkhize, Absa Group’s Managing Executive of Absa Vehicle & Asset Finance.

Case-by-case basis

Douw Leadley of MFC says the bank will look at each individual on a case-by-case basis. There is no blanket approach, and it will depend on the history of the client with the lender.

“Like most financial institutions, we do not want to take your car. Our first option is, where possible, to help the customer keep the car.”

But it does depend on the situation. If you recently bought the car and there is a significant amount outstanding, and you do not have an income, there is not much room to move or negotiate. In this situation your best option is to sell.

Leadley says MFC has a division called Assisted Sale which customers can use to ensure they are selling at the best possible price.

“A desperate seller may take the first offer they get which could be less than the market value. By contacting Assisted Sale, the team can provide you with a good idea of what your car is worth and provide details of recommended dealerships.”

They will also compare any offer to what you could expect to get on auction. Absa has a similar division called HelpUSell.

In most cases there may be a shortfall between what you owe and the value of car. You would need to negotiate a settlement agreement either through a repayment plan or an agreed lump sum.

“If a client uses this platform and we know they received the best price for the vehicle, we have various settlement plans linked to HelpUSell to assist the customer rather than face a long legal process,” says Mkhize.

Mkhize says that in a case where there is a shortfall and the client has no income, it is not possible to restructure a loan. If the debt is significant and cannot be written off, it would be noted as a liability against the client with the agreement that it will be repaid once they have an income.

Avoid legal action if possible

“It is important that the client discusses this with us so that we have an agreement in place, and we do not take legal action,” explains Mkhize.

Once a bank starts with legal action it becomes a very costly exercise and those costs are added to the outstanding debt. A client who has been actively working with the bank to resolve the issue is in a stronger situation to ask for leeway.

“We want to find a solution that allows a client to walk away from the transaction in a manner that does not compromise the bank or client. It is still important to remember that this is our depositors’ money, so we have a responsibility to collect outstanding debt.”

If you cannot afford your car, the worst thing you can do is miss payments without reaching out to the bank.

Leadley says that once you miss three car payments, the debt is handed over to the legal department and the car is repossessed. It is usually at this point that a client starts engaging with the bank.

Mkhize says that while the bank would still be open to discussion it does become more complicated. In some cases, the legal action would have already started, and the costs incurred are added to the debt. The bank is also less likely to trust that the customer would meet any new agreements that are made.

Mkhize says that while selling a car may not be the customer’s first choice, by selling the vehicle and buying a less expensive car, it may be the best outcome ‒ especially if it is a luxury vehicle.

“When you add up the costs of insurance and fuel on a luxury car, there are even more cost savings than just the instalment.” Mkhize adds that now is a very good time to sell. “There is a shortage of new cars, so we are seeing premiums paid for secondhand cars at the moment.”

In conclusion, if you are struggling to meet your car payments there are many options open to you – but you have to start the conversation with the bank now.

If you are not getting anywhere, ask to escalate your problem to the bank’s debt review department where consultants are trained to consider various debt repayment options. If you reach an agreement, make sure you have it in writing.

Refinancing options available

If it is a temporary situation, as we saw in lockdown, you could opt to not pay the instalment for a month or two but catch up the missed payments over the next few months. What is important is that you have the conversation and don’t just miss payments. The bank can then structure the repayments and it does not appear as being in arrears.

If you are unable to catch up the missed payments, the bank can move the missed payments to the end of the contract in a similar way to a balloon payment. Leadley says this is not always advisable as it increases the cost of finance with a higher interest bill, but it allows you to keep the car.

These options are only available if you have the income to continue with the repayments.

How to talk so the bank listens

When it comes to negotiating with your credit providers, you need to prove that you are meeting them halfway.

Draw up a proper budget, show what cuts you have made and how much it is costing you to live. The bank is less likely to be sympathetic if you have luxury items on the list like R1 000 for DSTV, yet here you are telling them you cannot pay for your car.

This article first appeared in City Press.