What Are The Risks Of Defaulting On Your Car Loans?

Consider the risks of defaulting on car loans before you sign a loan agreement. Many people make the mistake of accepting car financing, particularly that provided straight from the dealer, as if it is a discount off the sticker price of the vehicle. The fact is financing is very costly and defaulting is even more costly. While most cars are purchased with a degree of financing, taking care to arrange the right loan will protect you from the various risks. 

Repossession of Your Vehicle

The biggest threat when you are considering a car loan is the chance of repossession of the vehicle if you do default. The loan company will hold the title to your car, and you will not receive it until your loan is paid off. If you default on the terms you agree to in your contract, the company technically still owns the car and can take it from you at any point. They do not have to announce when they plan on repossessing the vehicle; in fact, they rarely do announce the event in order to prevent you from fleeing or trying to stop them. If you are at risk of default, take actions to stop the process so you can keep your vehicle. 

Credit Repercussions

Any time you default on a loan the action will hit your credit score. You will have a significant black mark in addition to a bad credit score. It is advised you should not seek any new loan until a default is at least 2 years, and preferably 5 years, expired. Any lender can easily view the terms of your default and repossession, and it will take some time to rebuild your credit to the place it was before your default. Interest rates on your existing credit cards and other loans may increase. 

Difficulty Getting Another Car Loan

It goes without saying the most wary lenders will be auto lenders. Once you have defaulted on a car loan, new car loans will be near impossible to achieve. You will have to provide a significant down payment at any point in the future if you seek a new car. Furthermore, you may be prevented from securing other high end loans like mortgages. Installment loans are considered a strong measure of your ability to responsibly manage your credit. Other installment lenders will be particularly hesitant with you. 

Preventing Car Loan Defaults

The best protection against loan default is careful planning on the front end. Experts advise considering your budget and loan requirements before shopping for a vehicle. This prevents you from getting your sights set on a car that is too expensive. Providing a good down payment on your car is also essential to assure your monthly payments can remain low enough for you to afford. The best rule of thumb when considering how much car you can afford is to budget yourself based on salary. First, cut your salary each month in half. Deduct your rent or mortgage from this amount. Take away any fixed payments you have like student loans or electronics loans. The amount remaining is how much you can afford on a car loan each month without defaulting. 

 

 


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