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Defaulting on a car loan can result in fees, long-term damage to your credit score, and the repossession of your car. Thankfully, there are several ways you can avoid defaulting on your car loan—or at least minimize the aftermath of an auto loan default.
Millions of Americans live paycheck to paycheck and saving money isn’t always an option. Even when it is, you can burn through those savings quickly if you lose your job, face a medical emergency, or otherwise fall on hard times.
Defaulting on a car loan can very quickly become a terrifying reality if you aren’t prepared. But knowing how to avoid defaulting on your car loan and what to do if it happens can make a world of difference—not just immediately, but long term, as well.
That’s why the car super app Jerry is breaking down everything you need to know about defaulting on a car loan, including what it is, how to avoid it, what happens in a car repossession, and what all of this does to your credit score.
What happens if you default on your car loan?
Delinquency refers to an auto loan payment that’s late. Many lenders offer a grace period of a week or two before taking further action—usually penalizing you with a late fee and then contacting you to remind you that your statement is past due.
If you haven’t caught up on your auto loan payment after 30 days, the lender will usually report the delinquency to the big three credit agencies: Equifax, Experian, and TransUnion. This will affect your credit score, so always try to make your car payments on time.
After delinquency, auto lenders will declare an account as in default. This might happen after the first, second, or third payment, and each lender has its own window for when a car loan is considered to have defaulted.
In default, the lender will go to any and all lengths to recoup their losses. This includes handing your account over to in-house or third-party collection agencies who can repossess your car.
Pro Tip Some lenders might accept a partial loan payment with the expectation you’ll pay the remainder back very soon. This is worth a try if you’re facing a short-term financial hurdle and you know you’ll get back on track quickly.
It could hurt your credit score
Being delinquent on car payments hurts your credit score, but not nearly as much as defaulting on a car loan. Negative marks from delinquent or defaulted car loans will stay on your credit report for seven years.
That hit to your credit may not seem like a big deal today, but it has serious repercussions for the better part of a decade. Getting credit cards or loans, buying another car, and buying a home all require good credit scores, making this a huge setback if it can’t be avoided.
Your car could be repossessed
Lenders use your vehicle as collateral for an auto loan, putting a “lien” on the car. This gives the lender the legal right to seize the vehicle if you default on your loan.
Most lenders will try to work with you to get your account out of default. If they can’t reach you or if reasonable terms can’t be met, they’ll resort to their last option: hiring experts to repossess the car.
Repossessed cars are auctioned off and the funds used to pay down the remainder of your loan. Any debt that remains after that auction becomes a “deficiency balance.” The lender can get this back by suing you, garnishing your wages, or working with collections firms.
If you’re able to scramble the money together, you can still get your car back after it’s been repossessed—but only if you act very quickly.
Pro Tip Some repo garages will charge absurd storage fees and can even attempt to put a lien on your car if you don’t pay those fees quickly. Contact the garage that has your car to ask if they have additional fees you need to worry about.
MORE: What is a car lien?
How to avoid defaulting on your loan
Depending on your financial situation, there are several things you can do to avoid defaulting on your car loan.
Negotiating and loan deferments
Most lenders are willing to work with you when times are tough and try to come up with reasonable, fair solutions. Reach out before the situation gets grim and you might be able to arrange a payment plan to help you get back on track.
If this isn’t an option, ask about loan deferments. This lets you skip a car payment for one month—but you’ll still owe that payment later. Some companies will let you defer the loan for free, others might ask you to pay the interest alone, and some charge a fee to defer.
Most lenders will allow at least one, but usually no more than three deferments throughout the course of the auto loan. In a short-term financial bind, this solution could help a lot.
Pro Tip If you’re writing a letter of hardship, explain not only why you need a loan deferment, but when and how you expect to get back on track. The lender will be more willing to help if they see you have a plan.
If you have good credit, consider refinancing your car loan with another lender. This might result in lower monthly car payments and lower interest rates, making the car payments easier to handle each month.
Note that lenders likely won’t work with you if your credit score is worse today than it was when you bought the car, or if the car is more than five years old.
Even if refinancing is an option, it may not be your best solution. If the car has depreciated past the remainder of the loan or if your loan has a prepayment penalty, your new car payments may not be significantly lower than your current ones.
Debt consolidation involves taking out a personal loan to pay off the remainder of your car loan. This is a good option if you have strong credit and if there’s no prepayment penalty on your loan.
With debt consolidation, you’ll rid yourself of the risk of repossession—and you might be able to take out enough of a loan to cover other debts too. Debt consolidation effectively puts all your payments under one roof.
Pro Tip Only consider debt consolidation if you have a carefully-considered plan to pay the new loan off and you’re confident you can keep up with the payments.
Surrendering your car
When all else has failed, your last-ditch solution is also the most upsetting: surrendering your car to avoid the repossession from hitting your credit report.
Surrendering your car should only be considered as a final option. This will still harm your credit, but it shows the credit agencies that you tried to do right by the lender—and that does count for something. The damage done to your credit score won’t be nearly as bad as a repo would’ve been.
Cut down on car expenses by saving money on insurance
When the going gets tough financially, saving money becomes more imperative than ever before. Jerry can help you shrink one of your big-ticket bills: car insurance.
Jerry is the super app that helps you save time and money on your car expenses, including insurance. It takes less than a minute to sign up and you’ll receive quotes from dozens of top insurance companies like Progressive and Allstate.
Once you’re ready to switch, Jerry will handle the paperwork and help you cancel your old policy. You can all the benefits without any of the hard work—and you can put that extra cash towards your loan payment!
What is a car default?
A car default occurs when you’ve missed one or more payments and the lender decides more serious action is needed to get their money back. Most auto lenders consider a loan in default after three months (90 days) of missed payments.
A default does long-lasting damage to your credit score and can result in the car being repossessed.
Can I get my car back after it’s been repossessed?
Yes, but only if you act quickly. If you pay off your past due balance before the car is sent off for auction, you can usually recover it from the repo garage. Note that the garage might charge you additional fees.
How long does a repo stay on your credit?
Delinquency, default, or repossession will stay on your credit report for seven years.
Can I get a car loan with a default on my credit report?
You can usually get a car loan after default, but it might be difficult. You’ll need to be employed with a stable income, and it helps if you’ve paid off debts and have rebuilt some of your credit.
Most cities and towns have car dealerships that specifically work with customers with bad credit or no credit. They’ll sell you a car (usually used and marked up) and then charge exorbitant interest rates. Be sure to read the fine print!