Consumers who take out a loan for financing a new or used vehicle seldom understand what happens in cases of nonpayment, especially regarding an auto loan charge-off. Here’s a guide on how lenders use one such unfriendly tactic in default situations.
What Is an Auto Loan Charge-off?
An auto loan charge-off represents an amount that the bank or other lender assesses as an outstanding debt from someone who has bought a car, truck or other vehicle on credit. Banks find the charge-off amount by taking back the vehicle, reselling it, and sending the resulting amount, minus the sale price of the vehicle, to collection agencies for further attempts at collection.
When Does the Bank or Lender Issue a Charge-off?
Conventionally speaking, a charge-off is generally done after the vehicle is repossessed and resold, however the lender needs to issue the charge-off within a set period of time. Some consumers claim they have seen charge-offs on the books without a classic repossession situation.
Debts are usually marked as charge offs after six months with no payment. A charge off amount ends up on the borrower's credit score is a judgment, and collection agencies attempt to get it from them
Handling an Auto Loan Charge-off
As mentioned above, the charge-off reflects an amount that the lender has invested in a vehicle loan. If the bank or finance company is able to recover the vehicle through repossession, they can resell it and collect some of the money that way. All of the rest of their investment is something they have to try to collect from the borrower. That amount represents a tax burden to the lender, so in order to write it off on the corporate tax return, they need to process a charge-off.
When a borrower wants to be proactive about handling an auto loan charge-off, the best time to do this is before repossession. Borrowers can use loan modification, debt forgiveness scenarios or other tools to keep their auto loan afloat. Some refinancing companies will take on this kind of debt and lower the monthly payments so that the borrower can meet them. The only way for the debtor to clear themselves of the debt without paying it off is to declare bankruptcy, though this will not work in all circumstances and can remain on your record for up to 10 years.
Bankruptcy and Credit Score
Even if paid, they have a drastic negative effect on your credit score. In fact, charge offs are the number one cause of people being rejected for loans. If your debt is classified as a charge off, the record will appear on your credit report for seven years and 180 days from the date of your last payment. Should you pay the charge-off during that time, the status will simply change to "paid charge-off," or "settled charge-off" (if the debt is settled rather than paid in full).
Charge offs are unfair to business owners and monumentally destructive to the credit reports of those who owe money. The best thing to do, of course, is to always remain financially responsible and avoid being trapped in this position in the first place.