What Is the Worst That Can Happen If I Don't Pay My Car Loan on Time?

What Happens When You Default on a Vehicle Loan?

Your lender may consider your account delinquent as soon as you miss your car payment deadline. The lender will most likely charge you a late fee and attempt to recoup the outstanding amount. You may have a short grace period, such as 10 or 15 days, during which time you can bring your account current without incurring a late charge or other ramifications. After 30 days, your lender will send the late payment to all three major credit bureaus (Experian, TransUnion, and Equifax), which will show up on your credit reports.

After a missed payment, the next stage is default. Each lender has their own timetable for declaring your loan in default; some may do it immediately following a missed payment, while others wait 90 days or more. When you default, the lender devotes more resources to collecting your debt, turning your account over to their in-house collection staff or a third-party collection agency that tries to recoup the money.

Consequences of Defaulting on a Auto Loan

A poor credit rating is a serious barrier to purchasing a vehicle. When you don’t make your auto payments, it means that you can’t do the things you want with your car, such as drive it or sell it. If you default on a vehicle loan, this can have long-term financial consequences for years. The inability to get credit in the future.

A missed payment can have a significant negative effect on your credit score, especially if it’s late. Because payment history is the most important component in credit evaluation, even a single missed automobile payment may have a severe influence. For seven years, any delinquent payments on your loan will show on your credit report.

You could be hit with a repossession order. The car serves as collateral for a loan, so the lender can seize it if you’re in default. A lender may be able to repossess your automobile as soon as you miss one loan payment in some states, and they do not have to give you any notice. Lenders, on the other hand, will generally phone you before taking the extreme action of repossessing your automobile if you do not make your required payments.

The lender typically sells the car at auction to recoup the money you owe on the loan after repossessing it. If the sale does not produce enough money to cover your loan, the lender may seek additional funds from you or sue you to get it.

When your vehicle is repossessed, it will be reported as a default to three credit bureaus: Equifax, TransUnion, and Experian. Furthermore, the bad publicity of having an automobile repossessed will exacerbate the negative effect of your debt. Repossession is a serious black mark on your credit report and remains there for seven years.

Even after your automobile is repossessed, you may still get calls, emails, and letters from collectors. If a borrower does not repay the entire loan amount within the time frame specified, lenders sell repossessed automobiles at auction and hope to recover the remaining amount of the loan, you’ll owe what’s called a “deficiency balance.” Finally, if you don’t pay the debt, the lender may sue you for the amount owed. Your wages could be garnished; a lien could be placed on your property. Even if you pay off your debt, an account in collections is noted on your credit report for seven years after the date of delinquency.

How to Avoid a Auto Loan Default

If you’re afraid you won’t be able to make your vehicle loan payments, don’t bury your head in the sand. Taking action can help safeguard your credit score. Here are some things to try first.

Make a Deal With Your Lender

Lenders are often willing to work with borrowers to find solutions when they default on their loan, since this costs them time, money, and aggravation. Contact your lender as soon as you begin having difficulties making loan payments. Reaching out first indicates that you’re making a genuine effort to resolve the issue, which may make the lender more willing to negotiate. This is best done before your payment due date.

Refinancing your automobile loan is a smart idea.

If you have a decent credit score and haven’t missed a car payment yet, but are concerned that you may do so in the future, refinancing your vehicle loan might be an option. It’s possible to refinance your loan, but you’ll need to contact several lenders. You can apply for a loan with one lender and have it refinanced by another. It’s a standard practice in the automobile sector. If you’re approved for an auto loan refinance, the new lender will take possession of your car from the original lender. Ideally, you’d like to refinancing to a loan with a lower interest rate, lower monthly payments, or both, which can make your debt more manageable.

However, refinancing won’t work for everyone. If your car loan has a prepayment penalty and you owe more on it than it’s worth, refinancing isn’t likely to save you any money. You may not be able to refinance if your automobile is older than five years old or your credit score is lower than it was when you got the loan you may not qualify for refinance.

Ask About Deferment Options

When you get a loan deferment, the lender agrees to let you skip a car payment or only pay the interest that is due in a month. You may be able to postpone up to three payments, but rarely more than that. If you have a deferment option in your loan agreement, you may simply select the “skip a payment” option online or in your payment coupon book to defer. If you do not qualify for deferment, you should submit a written hardship letter to the lender requesting deferment and providing your reasons.

If the lender approves your deferment, they’ll send you a forbearance agreement that outlines when you can resume payments and any costs or penalties associated with the deferment. Payments that you put off accrue interest on and are added to the end of your loan repayment schedule. Deferment is designed to be a short-term solution for individuals in financial difficulties. If you don’t think you’ll be able to handle your payments once the deferment is over, you might want to explore another option.

Find Someone Else to Take Over the Loan

Although this is not advised, some lenders allow you to transfer your vehicle loan to a new holder. If you want the loan to be authorised, you’ll need to locate someone with a decent credit score and comparable borrowing standards. If you know someone who might be a good match, contact the lender to find out whether they offer this service.

Surrender the Vehicle Voluntarily

If you know repossession is a certainty, you may lessen the damage to your credit score by giving up the car voluntarily to the lender. This will be recorded as a negative entry on your credit history, indicating that you defaulted on a loan. Once you reach a loan agreement, you avoid the worst effects of foreclosure: your house becoming repossessed (if it hasn’t already) and potential damage to your credit history. However, as long as you comply with the conditions of your loan, this does not have a significant impact on your credit score.

Avoiding a Vehicle Loan Default

When you’re in financial distress, defaulting on a car loan may appear to be a simple solution. Negative information on your credit report can have a long-term impact on your credit score, making it more difficult to achieve long-term financial objectives such as purchasing a home.

The first step in avoiding defaulting on your automobile loan is to contact your lender. Checking your credit score and report is essential since it will show you whether you qualify for refinancing or debt consolidation loans, which often need excellent credit.