My friend called me yesterday with a huge financial problem. A few years ago, he purchased a car using financing from the parent company (Honda, if anyone cares). It was a luxury SUV (which I was against him buying ;-)), and I believe it was brand new when he purchased it.
Unfortunately, midway through the loan period he lost his job and had a tough time making the payments. So he called up the bank and explained his situation to them. In response, they deferred some of his payments until the end of the loan – meaning that he could skip a number of months while he was out of work, and then those payments would simply be added to the back end of the loan, when (hopefully) he would be in a position to handle them.
When I made a similar arrangement with GMAC about 10 years ago, they actually took 3 payments from the middle of the loan period (so I had 3 “free” months) and then extended the end of the loan period by those 3 months. This really helped me to get through a tough financial situation.
The problem with my friend’s arrangement was that they apparently didn’t extend the time of his loan. So once the original loan period was over, instead of allowing him to pay the remaining 6 payments (I just made that number up, but it seems accurate) over 8 months, they expected the balance of the loan immediately. The problem is that he doesn’t have $4,500 lying around to pay off the loan.
Since he is working and is able to continue to make payments, he called them up and tried to come to an agreement. He initially asked for 5 months to pay off the balance, but they refused. He then figured that he could make enough sacrifices to pay it off in 8-10 weeks – they still refused and asked for an immediate payment. In the meantime, he sent them $1,000 and promised to send another $1,000 in 2 weeks.
At this point, I expected him to say that once they saw his commitment to paying off the debt, they decided to give him a little more time. Instead, they tried to repossess the car (I won’t go into the details here, but their attempt wasn’t successful)!
As of his last communication with the financing company, they told him that if he takes another 6 weeks (the earliest he told them that he could pay the balance in full) to completely pay off the loan, they will most likely charge off the account. At that point he will have to deal with a collection agency and take a hit on his credit report!
My Problems With Honda’s Stance
Since my friend contacted them, sent them almost double his normal monthly payment, and came up with a plan to pay the balance in 2 months, I think that they should work with him. In fact, he seems like the perfect person that they would want to work out a deal with. From only evaluating the facts (and not considering my bias in this issue), it seems like they can show him compassion while only taking on a small risk of being taken advantage of and losing money. It just doesn’t seem wise to me.
I think the thing that is bothering me more than anything is that Honda’s financing arm will not give him a definitive answer. If they would just tell him, “if you don’t pay off the balance by this date, we will charge off your account and send it to a collection agency”, then his life would be a lot easier. However, since they are only telling him what “may” happen, they are making the situation worse.
If almost seems like they are trying to squeeze every dime from him before they choose to take the car anyway. I would be so upset if they took $2,000 from me over a few weeks, and then sent someone to repossess my car anyway! I’m getting upset just thinking about it – you should hear how hard I am typing right now.
What Are His Options?
Allow Them to Repossess the Car – If he does this, then his credit score will still take a hit,and he will be out of a car!
Try to Get a Loan With Poor Credit – If he does this, then he should be able to pay off the car in full. He will keep the car, can he can pay off the loan in less than 2 months. Unfortunately, he will have to pay a very high interest rate,and he still runs the risk of missing whatever undisclosed deadline the financing company has set.
It is not easy to get a loan with bad or no credit history, so this option probably isn’t likely.
Borrow From Family and/or Friends – He will receive all of the benefits of borrowing from a bank or payday lender, without the high interest rates! Unfortunately, it may be harder to find someone able and willing (people may treat this with the same caution as becoming a cosigner for a loan) to loan him that much money.
Sell the Car Privately – He can try to find someone who is willing to buy the car for more than what he owes. In theory, that shouldn’t be too hard since it is definitely worth more than $3,400 (what he owed as of yesterday). However, it might be difficult for him to close a deal and receive the money in enough time to satisfy the financing company – especially since he doesn’t have possession of the title.
Use It As a Trade-In – This option provides the most benefits: He can have the current loan paid off immediately, his credit report stays in tact, and he continues to have a reliable car. Also, if he is careful with what replacement car he buys, he can be in a much better financial situation going forward.
Looking over his options, I think that his first choice should be to borrow from family and/or friends. In fact, that is what he is trying right now. Unfortunately, he hasn’t had success with this plan (his friends are either completely broke or can’t come up with the cash fast enough).
The next best option is to replace the car while using it as a trade-in. If he is willing to take less than he would receive in a private deal, then he can solve all of his immediate problems with this option. He is looking to finance another car, but this time a used one that costs around $5 or $6 thousand. This way, he can lower his monthly payments, be in a great position to pay off the loan early (since he was prepared to pay $3,400 in two months on the current loan), and even pay less in car insurance.
My Final Thoughts On This
Even though he is in a tough situation right now, I actually think he will be better off in the end. First of all, he is learning a couple of valuable lessons.
You must understand every aspect of every financial agreement you enter into. Because he didn’t realize that the balance would be due at the end of the original loan period, rather than being broken out into monthly payments, he wasn’t prepared. Before you go rushing into a deal – whether it be a deferment, borrowing money, making an investment, or anything else involving money – be sure to understand what is expected of you, and what you are putting at risk. It always pays to have another set of (experienced/knowledgeable) eyes look over any agreements!
The second lesson that I believe he learned is that the concept of debt bondage (or slavery) is real! Since Honda is the one who loaned the money, they are calling all the shots. As long as they aren’t violating any regulations or breaking the contract, they are perfectly within their rights to refuse to work with my friend. This is what happens when we choose to borrow money from someone else – unless you have crafted some special agreement, they are in charge of the arrangement.
At first, I was upset that Honda refuses to work out a payment plan with him. He was making his payments on time (after the hardship agreement was made), he called them to tell them that he couldn’t pay the balance in full (they didn’t have to hunt him down), he sent them a large payment to show his commitment to honoring his agreement, and he actually had a plan (most people would just leave it at “I can’t pay it”)! To me, that sounds like the perfect candidate for a payment plan – he was even willing to more than double his normal monthly payment.
However, once I consider this from Honda’s point of view, I realize why they refuse to work with him. If they let him send in the next $1,000 payment, he will only owe $2,400 on the car. If they repossess it and sell it, they will make a lot more than $2,400! Not only that, but if they sell it to someone who requires financing, they stand to make a lot more in interest payments (for someone buying a used car, the interest rate is always higher). They have so much more to gain by not working with him!
photo credit: Freedigitalphotos.net
What Are Your Thoughts?
- What would you do if you were in this situation?
- What would you do if you were the financing company?
- Have you ever been in a situation such as this – even if it wasn’t over a car?
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