When you take out an auto loan, you agree to make regular payments to pay it off over time. But sometimes, life can get in the way, and you may struggle to keep up with those payments.
What Happens If You Default On Your Automobile Loan? If you miss enough payments and default on your auto loan, the consequences can be serious. It could affect your finances, your credit score, and even your ability to get another loan in the future.
Understanding what happens if you default on your car loan is important so you can take steps to avoid it.
Let’s break down what happens when you default on an auto loan, the impact it has, and what you can do to prevent it.
What Does It Mean to Default on a Car Loan?
Defaulting on an auto loan means you’ve failed to meet the terms of the loan agreement, especially by not making your monthly payments. While the definition of default may vary depending on your lender, most consider the loan to be in default if you’ve missed payments for 90 days (about three months). However, some lenders may take action earlier if you’re consistently missing payments.
By signing the loan contract, you’ve committed to paying the agreed amount. Defaulting means you’ve broken that promise, and the lender can take action to recover the money you owe.
Read more: What Is The Typical Car Loan Length?
What happens if you default on a car loan?
When you take out a car loan, you agree to make monthly payments to your lender according to the terms of your agreement. Defaulting on your car loan means that you’ve failed to keep up with those payments. Typically, if you miss just one payment, your account becomes delinquent, and after 30 to 90 days of missed payments (depending on your lender), it is officially considered in default.
Keep in mind that many auto lenders offer a 10- to 15-day grace period after the payment due date, giving you some extra time before late fees or other consequences kick in.
1. Late Fees Will Add Up
Missing a payment or making a late payment usually means you’ll incur a late fee. The exact fee can vary depending on your lender, your loan terms, and the state you live in. Generally, late fees range from 3% to 5% of the missed payment or a flat fee of $25 to $50. Some states have laws that limit how much a lender can charge or how long they have to wait before charging a late fee.
Be sure to check your loan agreement for details on the specific late fee charges that apply to you.
2. Your Credit Score Will Suffer
Late or missed payments can hurt your credit score. Most lenders report delinquencies to the three major credit bureaus after 30 days of missed payments. Your payment history accounts for 35% of your FICO credit score, so a missed payment can significantly lower your score.
A defaulted loan can stay on your credit report for up to seven years, which can make it harder for you to qualify for future loans or get favorable interest rates.
3. Your Car Could Be Repossessed
When you take out an auto loan, the car serves as collateral. This means that if you default on the loan, the lender has the right to take your car back—this process is known as repossession.
In some cases, your vehicle could be repossessed after just one missed payment, though most lenders typically wait until you’ve missed about 90 days of payments. Keep in mind, repossession rules vary by lender and state, so timelines can differ.
Once your car is repossessed, the lender may sell it to recover some of the money you owe. If the car sells for less than the amount you owe on the loan, you may still be responsible for paying the difference, plus any repossession fees.
Repossession not only affects your ability to keep your car but can also damage your credit score, and that negative mark can stay on your report for up to seven years.
4. Your Loan May Go to Collections
If your car is repossessed and there’s still an outstanding balance on the loan, the lender may turn your account over to a collections agency. The collections agency will attempt to recover the remaining balance by contacting you via phone calls, emails, and letters until the debt is paid off.
In some cases, the lender could also choose to sue you for the remaining balance, which could lead to additional legal costs and complications.
5. You’ll Face Extra Fees and Penalties
Defaulting on your auto loan can lead to extra charges. These can include late fees, repossession costs, and other administrative fees. These additional fees can make your debt even harder to pay off.
6. You’ll Have Trouble Getting Future Loans
A default on your car loan can make it difficult to get loans in the future. Lenders may see you as a risky borrower and may either reject your loan application or offer you higher interest rates. This could make it harder for you to buy a car, purchase a home, or even get a credit card.
What Should You Do If You’re Struggling to Make Payments?
If you’re having trouble making your car payments, you don’t have to wait until it’s too late. There are steps you can take to avoid default and the negative consequences that come with it.
- Talk to Your Lender Right Away
If you can’t make a payment, contact your lender as soon as possible. Many lenders offer assistance, like modifying your payment plan or giving you a temporary break from payments. The sooner you reach out, the more likely they will be able to help you avoid default.
- Consider Refinancing the Loan
If you’re struggling with payments but want to keep your car, refinancing could help. Refinancing means taking out a new loan to pay off the old one, usually with a lower interest rate or longer term. This could lower your monthly payments, making them easier to manage. However, you should carefully evaluate the total cost of refinancing before making this decision.
- Sell the Car
If keeping the car isn’t an option, selling it may be a better choice than letting the lender repossess it. By selling the car, you can pay off the loan and avoid the costs of repossession and a deficiency balance. If the car is worth more than what you owe, you may even make a profit.
- Get Financial Advice
If you’re overwhelmed by your finances, consider seeking help from a financial advisor or credit counselor. They can help you create a plan for getting back on track with your payments and managing your debt.
How to Avoid Defaulting on an Auto Loan
The best way to avoid defaulting on your car loan is to stay on top of your payments. Here are some tips to help you stay in control:
- Create a Budget for Car Payments
Before you take out an auto loan, make sure you can comfortably afford the monthly payments. Take into account not just the loan, but also other costs like insurance, maintenance, and gas.
- Set Up Automatic Payments
Setting up automatic payments can help ensure you never miss a due date. This reduces the risk of late fees and a damaged credit score.
Read more: How To Reduce Car Loan Payments
- Build an Emergency Savings Fund
Having a savings cushion can help you cover unexpected expenses, so you’re less likely to miss a payment. Aim for an emergency fund that can cover at least three to six months of living expenses.
- Choose a Loan You Can Afford
Make sure the loan you choose fits within your budget. Don’t stretch yourself too thin with a loan that has higher payments than you can handle.
Conclusion
Defaulting on an auto loan can have serious consequences, from a drop in your credit score and repossession of your car to legal action and added fees. However, you can avoid these consequences by staying in touch with your lender, considering refinancing, or even selling your car.
By managing your loan carefully and making timely payments, you can protect your finances and avoid the negative fallout of defaulting.
FAQ’s
Q1. What Happens If You Walk Away from a Car Loan?
a car loan means you stop making payments and essentially let the lender take back the vehicle. This is often referred to as voluntary repossession because you’re choosing to let the lender repossess the car instead of continuing to pay the loan. However, this action comes with serious consequences that can impact your financial future.
Q2. How Long Can a Loan Stay in Default?
The length of time a loan can stay in default depends on the type of loan and the actions taken by the lender. Generally, expert said the default will remain on your credit file for 6 years, there are a few things you can do to slightly lessen the impact.
Q3. Is It Bad to Default on a Loan?
Yes, defaulting on a loan is definitely bad, and it can have serious consequences for your financial health. When you default, it means you’ve failed to make payments as agreed, which can lead to a chain of negative events.