You have lost your job a few months ago and you are now struggling to make ends meets. You are losing your job and your unemployment benefits cover food and rent, but not car payments. Your savings are also running low. What happens if you stop paying your car loan payments? It’s known as defaulting when you stop paying your car loan payments in the same way you did when you purchased it. Derogatory marks are placed on your credit report if you default on a car loan. This can cause a serious negative impact on your credit score and make it harder to obtain credit in the future.
What happens if you default on a car loan?
Your lender may consider your account delinquent if you fail to make your car payment by the due date. The lender will typically charge you a late fee, and attempt to collect the missed payment. There might be a grace period of 10 to 15 days during which you can bring your account up to date without being charged a late fee. Your lender will notify the major consumer credit bureaus Equifax, TransUnion, and Experian about the late payment within 30 days. They then add the information to your credit report.
After delinquency, default is the next step. Every lender has their own timetable for declaring your loan default. Some may do it immediately after you have missed a payment while others might wait up to 90 days. The lender will increase their collection efforts when you default. They may turn your account over to an in-house team or to a third party collection agency to try to recover the money.
Consequences for defaulting on a car loan
You can suffer financial consequences that last years if you default on your car loan. In the end, defaulting on a car loan can lead to a lower credit score, which could make it difficult to obtain credit cards or mortgage loans.
Late payments can have a negative impact on your credit score. A missed payment on a car can lead to a significant negative impact on your credit score. Payment history accounts for 35% of credit scoring. Your credit report will be affected for seven years if you default on loan payments.
Your car may be taken away. The car is used as collateral when you take out an auto loan. This means that the lender may be able to take it if you are in default. A lender might be able repossess your vehicle depending on the laws in your state and the terms of your loan agreement. They may do so as soon as you have missed one payment. You may not even need to be warned. Lenders will often contact you to inquire about missed payments, before taking the extreme step of repossessing your car.
The lender will typically repossess a car to recover the amount owed on the loan. The lender might sue you if the sale does not bring in enough money to repay your loan.
Repossession of your car will have a negative effect on your credit score. Repossessions are a negative mark on your credit score and can stay there for seven year.
Any outstanding debts could be sent to collection. Collection agencies could still contact you by phone, email, and letter even after your car has been repossessed. Lenders will sell repossessed cars at an auction. If the lender doesn’t recover the loan balance, it could send you letters and emails. The lender may sue you for any money owed. You could lose your wages and have a lien placed on your house. Even if the debt is paid off, the account in collections will remain on your credit report for seven year from the date of delinquency.
How to Avoid Default on a Car Loan
Don’t be afraid to speak up if you are worried about your ability to pay your auto loan repayments. Taking action can help protect your credit score. Here are some suggestions.
Talk to your Lender
Lenders are usually willing to work with borrowers to resolve problems. Contact your lender immediately you have trouble paying your loan repayments. The lender may be more open to negotiating if you reach out to them first. This should be done before the due date for your next payment.
Refinance your car loan
Refinancing your car loan may be an option if you have good credit and have not missed a payment on your car. Refinance is not done through a dealer, but directly with lenders. The new lender will take the title of the car from the original lender if you are approved for an auto loan loan refinance. You should refinance to a loan that has a lower interest rate, lower monthly payment, or both. This will make it easier to manage your debt.
However, not everyone can benefit from refinancing. Refinancing won’t help you save money if you owe more than your car is worth, or if you have a prepayment penalty on your car loan. Refinance may not be possible if your vehicle is older than five years or your credit score has fallen below the level it was before you took out the original loan.
Take into consideration debt consolidation
A personal loan can also be used to consolidate debt and repay the car loan. This is a great option if you have good credit, are struggling with other debts (such credit card debt), and have a plan for keeping your debt under control.
Locate someone else to take over the loan
While most auto loans do not allow you to transfer your loan, some lenders will. To be eligible for similar loan terms, you will need to find someone with good credit. Contact the lender if you are interested in a candidate.