Missing car loan payments can lead to default, vehicle repossession, and significant damage to your credit score. Law in most states permits lenders to repossess vehicles soon after a loan default. In the wake of the default comes a potential collection or more financial consequences. This article outlines what happens when you miss payments and what options you have to prevent or manage vehicle repossession.
Many Americans struggle to pay their car loans on time. Consequences of non-payment or late payments include late fees and negative impacts on your credit score. In addition, more interest will accrue on your loan due to the longer repayment period, if you resume payments later on.
Continuous late payments trigger warnings from lenders about non-compliance with loan terms and the imminent risk of repossession. Between 30 to 90 days of non-payment, lenders often declare your loan as defaulted. Once in default, lenders can repossess the vehicle without prior notice.
If your car gets repossessed, lenders usually attempt to recover their losses through auction or private sale of the vehicle. In auctions, you may have the chance to purchase the car. However, the standing balance of your loan (plus expenses) and the value gained from selling the car leaves a remaining amount (deficiency) which would still be owed to the lender. In some states, lenders can sue you to recover this deficiency.
One critical point to understand is that simply stopping payments does not eliminate your car loan. If you can’t afford your payments anymore, more suitable solutions include refinancing, talking to your lender for possible restructuring, or selling the car.
Being late with a car loan payment negatively affects your credit score. If you can’t make your payments, the immediate step to take is to inform your lender. Many are willing to work out ways that won't lead to losses on their part. Solutions proposed could include voluntary repossession, refinancing, or selling your vehicle.
Voluntary repossession involves informing your lender about your inability to repay the loan. The lender takes your car and sells it to recoup some of the loan amount. What you owe then is the difference between the loan and the sale value, minus the high fees associated with involuntary repossession. However, a voluntary repossession can stay on your credit report for up to seven years.
Another option is refinancing your car loan with the same lender or a different one. This can lower your interest rate or lengthen your repayment term, thereby reducing your monthly payments.
Selling your car to pay off your loan is perhaps the simplest solution. If the selling price of your car exceeds the loan, you can use the difference to buy another car. If the selling price is lower, you'll still have to pay the remaining balance to your lender.
In conclusion, a couple of missed payments may prompt car repossession. A repossession remains visible on your credit report for approximately seven years. The number of times you can defer payment largely depends on lender policies. Consider reaching out to your lender for lower or more flexible payment options before your financial situation worsens. Selling your car to pay off the loan or opting for voluntary repossession may serve as last resorts.