What are the Consequences of Defaulting on an Auto Loan?

Defaulting on an auto loan will typically result in loss of your car in addition to other financial penalties. You will only lose your car if you secured the loan by using the car as collateral. If you are not sure whether your loan is secured or unsecured, check your loan contract. Most loans direct from dealers are secured, however. Whether or not your car is seized, you will also face other fiscal and personal repercussions as a result of the default.

Drop in Credit Score 

Your credit score will go down immediately and significantly after a default. It is not unusual to see your score drop 50 to 100 points from this type of event. It will take years of making payments on time to overcome this credit score dip. In fact, your score will drop the second you are 30 days late on even one of your monthly car payments. When your payments go 60 days late or 90 days late, the score will drop again. Before you default, the loan will likely go to collections, which will again take a chunk out of your credit score. When you see these things occurring, it is necessary to be proactive in resolving the issue by cutting back on spending, setting up automatic payments through your bank or negotiating lower monthly payments with your lender.

Negative Credit Report

Your credit score is just part of your credit report. Another section of the full report has an illustrator that shows exactly when you missed payments and by how long. Late payments will typically remain on a credit report for 2 years, depending on the state you live in. Defaults will remain on your credit score even longer, and they will be a more substantial mark against your financial stability.

Higher Interest Rates on Existing Loans

If you have any open adjustable-rate loans, you can expect those loan rates to sky rocket. This is particularly dangerous for those people who are in an adjustable-rate mortgage. All of a sudden, your mortgage payments may go up much higher than you were paying before. Without appropriate savings, this could push your mortgage into default right after you defaulted on your car loan. The rise in adjustable-rate loan expenses is one of the contributing factors to most bankruptcies. If you cannot afford to pay your loan payments as the rates increase, you may also be at risk for bankruptcy.

Harder Time Finding New Loans

When you default, your car will likely be seized. This means you will be in a tight spot to get a new vehicle. Seeking a new loan after a default is very tricky, especially if it is the same type of loan you defaulted on. You will need to look for a specific high-risk loan, and high-risk loans come with much higher interest rates. They are difficult to secure without collateral, and they will rely on you having a substantial income, among other factors. You will face questions on any loan application within a few years of the default.


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