What Happens when You Default on a Car Loan?

If you do not meet the terms of your loan contract, may default on a car loan. Each contract stipulates the exact terms of default - whether it is a certain number of missed payments or failure to pay off the loan on time. Defaulting on any loan causes many negative financial repercussions for a borrower. Defaulting on a car loan will have specific, unique effects on your assets.

Drop in Credit Rating

Missing a car payment will result in an immediate drop in your credit score. Your lender will inform you by mail and phone, in most cases, that you are late on a payment. You will typically have a short period of time to resolve this issue. Once the payment goes 30 days past due, it will hit your credit report. Having a payment 30 days past due is a small mark against your credit; the negative affect gets larger at 60 days and then again at 90 days. If you miss more than one payment, your FICO scores begin to drop swiftly. It will take years to repair your credit rating after many missed or late payments. 

Debt Goes to Collections

A lender will typically wait until your debt is 30 days late, and you have not responded to phone calls or letters, to send your debt to collections. Your contract will typically stipulate when your lender can send your past-due debt to collections. If you are contacted by a collections agency, make sure they have the right to contact you by asking for written evidence of your debt. Once your debt goes to collections, however, you will see your credit score drop even more. You will also begin to feel pressured and trapped as the collections agency attempts to recover the payments from you. Being contacted by a collections agency typically causes a great deal of stress on a borrower.

Negotiate to Avoid Default

If you are not proactive in responding to attempts for the lender to collect from you, you will typically receive no notice before your car is seized. This means you have a brief period of time to quickly resolve the debt and prevent this. Lenders would rather have your money than repossess your car, so they may be willing to work with you if you are able to make at least a portion of the payments you owe. The only way you will receive these options is if you respond to attempts to collect. 

Asset is Seized

Ultimately, if you default, your asset may be seized. When a lender repossesses your car, you will have a short period of time to try and reclaim the asset. You can do this only by paying off the loan balance plus repossession fees. Ultimately, the lender will be forced to sell your car if you do not pay off the loan. Since there may be a difference in the amount you owe on the loan and the amount the lender recoups at auction, you may still owe a balance on the loan even after you have forfeit the asset.

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