What Happens When You Default on Your Auto Loan?

Missing your car payment brings stress and frustration. You already know that. Once you fall behind, you become delinquent. Your credit score takes a hit. Fall further behind and you enter default territory. The consequences get much more serious from there.

Defaulting on a car loan damages your finances and credit score. But you can avoid it. You need to understand how auto loan default happens. You need to know the consequences. Most importantly, you need to learn how to prevent it.

How Auto Loan Default Happens

Most people need a car loan to buy a vehicle. Make timely payments and everything runs smoothly. Miss payments and you risk delinquency, then default. Just like missing credit card payments, falling behind on your auto loan puts your vehicle at risk of repossession. Your credit score suffers too.

Miss one payment and your lender can consider your account delinquent. Many lenders offer a grace period though. You typically get 10 to 15 days to make your full payment. Pay within the grace period and you avoid late fees. Your lender won’t report the late payment to credit bureaus either.

Fail to pay after 30 days and your lender reports you. The three major credit bureaus receive the notice: Equifax, Experian, and TransUnion. Missed payments and delinquent accounts damage your credit score. The impact shows up on your credit report.

Delinquency is serious business. Ignore it and you slide into default. Your loan contract spells out when default occurs. The timing varies by lender. Some lenders declare default after just one missed payment. Others wait 90 days. Default brings severe consequences.

What Happens When You Default

Default triggers collection activities. Some auto lenders use in-house collections teams. Others sell your account to third-party debt collection agencies. These agencies try to recover payment. You’ll receive calls and letters. You could face a lawsuit for the defaulted auto loan debt.

Your lender may repossess the vehicle at this point. Most car loans are secured loans. The vehicle serves as collateral for the loan. The lender can legally take it back. They sell it to pay off your loan. Some lenders handle repossession in-house with asset recovery teams. Others hire repossession companies. Repo men track down and seize the vehicle.

After repossession, the lender sells your car. Sale proceeds go toward your defaulted account. If the sale doesn’t cover your full loan amount, you pay the difference. The difference is called the deficiency balance. Some states let lenders pursue borrowers for deficiencies. Others don’t. State laws also vary on loan reinstatement. Some states let you get your car back if you can bring the loan current.

Collections and repossession both appear on your credit report. Your credit score drops significantly. Future credit becomes harder to get. Banks, credit unions, and online lenders see you failed to pay. They become less willing to approve you for loans or credit cards.

How to Prevent Auto Loan Default

Struggling with car payments? Talk to your lender immediately. They may work out an agreement with you. Get everything in writing. Ask about fees or penalties upfront.

Your lender might negotiate by:

• Deferring payments for several months
• Renegotiating loan terms like length, interest rate, or monthly payment
• Offering relief programs specific to your situation

Refinancing your auto loan can help you avoid default. A refinance can lower your monthly payment. You might get a lower interest rate. You could extend the loan term. Both options reduce your monthly burden.

You could sell the car to pay off the loan. Just remember the math matters. You need to sell for at least what you owe. Sell for less and you must cover the difference. The lender can still collect the deficiency.

Voluntary repossession is another option. You give the car back to the lender yourself. This looks better on your credit report than involuntary repossession. You might still owe a deficiency balance though.

Consider getting professional help. Our partner Cambridge Credit Counseling can help you assess your budget. Counselors review the debt you owe. They help you make a plan to address it.

Understanding Your Options

Act quickly when financial trouble starts. Contact your lender before you miss a payment. Ask about hardship programs. Many lenders offer temporary solutions. Payment deferral gives you breathing room. Loan modification changes your terms permanently.

Document every conversation with your lender. Keep emails and letters. Note the date, time, and person you spoke with. Written agreements protect you. Verbal promises don’t hold up later.

Review your loan contract carefully. Know when default occurs for your specific loan. Understand your lender’s repossession rights. Check if your state allows deficiency judgments. Knowledge gives you power to negotiate.

The Impact on Your Financial Future

Default stays on your credit report for seven years. During that time, you’ll face higher interest rates. Credit card applications may get denied. Future car loans come with steeper rates. Apartment applications become harder to approve.

Your credit score can drop 100 points or more. The exact impact depends on your starting score. A single default can push you from good credit to poor credit. Recovery takes time and consistent positive payment history.

Future lenders see default as a red flag. You become a high-risk borrower. Some lenders won’t work with you at all. Others charge premium rates to offset their risk. Your borrowing power decreases significantly.