What Happens If You Default on Your Auto Loan?

Defaulting on a car loan can have serious financial consequences. When you take out an auto loan, your vehicle serves as collateral on the debt. If you fail to make payments, the lender can repossess your car. A default also damages your credit standing.

Understanding what happens when you default on an auto loan can help you avoid this situation or take steps to get back on track if you do fall behind

What is Defaulting on a Car Loan?

You default on your auto loan when you are unable to make your scheduled monthly payments. Different lenders may have varying definitions of loan default in their contracts. But in general, missing multiple payments in a row constitutes a default.

After a certain number of missed payments, the lender will send the account to collections and usually move to repossess the vehicle. The repossession timeline varies, but it can happen as soon as you miss your first payment in some states.

Auto Loan Default Timeline

Here is a general timeline of the auto loan default process:

• 1 month late – The lender contacts you requesting payment Late fees may be charged

• 2 months late – Your auto loan is likely reported as delinquent to the credit bureaus. Additional late fees accrue.

• 3 months late – Your loan is considered in serious default. Repossession warnings are issued.

• 4+ months late – Vehicle repossession is imminent. The lender may take the car and sell it to recoup losses.

Again, default timelines vary between lenders. Refer to your original loan contract to understand the exact terms. Acting quickly after the first missed payment gives you the best chance to avoid repossession.

Consequences of Defaulting on a Car Loan

Defaulting on your auto financing has two major consequences – repossession of your vehicle and damage to your credit.

1. Repossession

Since your car serves as collateral for the loan, the lender can seize it if you default. They may auction or sell it to recoup their losses from the unpaid loan balance.

If the car sells for less than you owe, you are responsible for the deficiency balance. The lender can sue you, garnish wages, or send the amount to collections.

After repossession, you have a short window to “redeem” the vehicle by paying the full loan balance plus the lender’s repossession costs. This right varies by state.

2. Credit Damage

Defaulting and having your car repossessed also hurts your credit. The late payments will show up on your credit reports, dragging down your credit score.

A repossession can stay on your credit reports for up to 7 years. This can make it difficult to qualify for financing including loans and credit cards.

How to Prevent Auto Loan Default

You have options if your car payments become unaffordable or you fall behind. Avoiding default helps you keep your vehicle and credit intact. Consider these proactive steps:

Refinance the Auto Loan

If your credit has improved since getting the original loan, you may qualify to refinance at a lower interest rate. This can potentially lower your monthly payments. Even a half point decrease can save substantially over the loan repayment period.

You also may be able to stretch out the length of the loan through refinancing. Just be aware this results in more interest paid over the full term.

Sell the Car

Selling the vehicle and paying off the loan with the proceeds lets you avoid default. Of course this means you’ll need to purchase a different used car with no monthly payment. But it removes the burden of unaffordable payments.

If you owe more than the car will sell for, try to come up with the difference by borrowing from family, using savings, or picking up extra work. Default should be avoided at all costs.

Ask the Lender for Assistance

Contact your lender before you miss payments to discuss options. You may be able to defer payments temporarily or restructure the loan terms. Avoiding repossession is in the lender’s interest too, so they may be willing to work with you.

Seek Credit Counseling

A non-profit credit counseling agency can help you manage debts and create a budget. They may be able to negotiate with the auto lender on your behalf. This can make payments more affordable and help you avoid default.

Options After Your Car is Repossessed

If your vehicle does end up repossessed, here are some steps to take:

• Pay the balance – If permitted in your state, you can reclaim the vehicle by paying the full outstanding loan balance plus the lender’s repossession costs.

• Reinstate the loan – In some states, you have the option to reinstate the original auto loan terms after repossession by becoming current on the payments.

• Buy it back at auction – Attend the auction where the lender sells the car. You may be able to repurchase it for less than you owe if others don’t bid high.

• Negotiate a settlement – Work with the lender to settle the deficiency balance for less than the full amount. Getting some obligation removed looks better than defaulting.

• Improve your credit – Building your credit back up makes it easier to get approved for future auto loans so you can buy another car.

The consequences of defaulting on a car loan can linger for years. But staying proactive and exploring all options can help you keep your vehicle and credit intact.