Auto Loan Charge Off: Cleaning Up the Mess

An auto loan charge off occurs when a borrower defaults on a car loan, the lender repossesses and sells the car, and the lender removes the balance of the loan from its books. A charge off is a loss for the lender and negatively impacts the borrower’s credit report.

The Mess after a Charge Off

If you have borrowed money to buy a car and fall behind on payments, after a given number of missed payments, the lender can repossess your vehicle. Typically, the lender has retained the vehicle’s title and can simply take the car, with or without your permission. You are still responsible for the loan. The lender will sell the car, and your outstanding loan balance is reduced by the amount of the sale.

After a given time, usually a total default period of 180 days, the lender will charge the loan off. That means the lender takes the loan off its books, records a loss and, usually, turns the uncollected balance over to a collection agency.

At this point, the borrower has lost the vehicle and is still responsible for part of the loan balance.

A Credit Report Mess

All of your borrowing is listed on a credit report in your name maintained by the three primary credit reporting bureaus: Experian, Equifax and TransUnion. Any negative activity on your loans, such as late payments and charge offs, are listed on your credit history and lower your credit score making it more difficult and more expensive to borrow in the future.

A charge off has a doubly negative impact on your credit report. The original lender reports the charge off as a negative, and the collection agency that receives and attempts to collect the charged off loan balance reports it as a negative. Additionally, a negative report would have been made on your credit history for each late or missed payment prior to the charge off.

Negative information on your credit report stays there for three years (longer for home foreclosures and bankruptcies). So without a negotiated settlement between you and your lender, only time and a good borrowing track record will clean up the mess.

Negotiating with the Lender

If you are in default on an auto loan, you can avoid a charge off, and avoid the resulting mess, by returning the vehicle, negotiating down the outstanding loan balance by the amount of the value of the car and paying the difference.

It is unlikely that a borrower who is in default will have assets on hand to pay off the balance, otherwise they would have paid off the loan in the first place. However, it is possible to get a second loan for the balance, saving your credit rating.

Your Lender and Your Credit History

Even after a charge off has occurred, it is possible to clean up your credit history mess. Since lenders report negative information on you to the credit bureau, if you pay the outstanding charged off balance, a lender may consider approaching the credit bureau to have the black mark removed. They are under no obligation to do so and seldom do it, however it is the primary incentive they have to offer you to get you to repay.


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