Car Loan Default: Credit Score Effects

A car loan default is when a consumer fails to make an agreed upon payment to the finance company that lent the money for the auto purchase. There are always reasons for non-payment but after a certain point in time, the finance company will report the loan in arrears. It will then become part of your credit history and will affect how your credit score will be calculated.

Protecting your credit score is an important part of being not only a wise consumer but maintaining a credit-worthy status. Your credit score will affect almost every area of your life when conducting large financial transactions-even renting an apartment, condo or other large ticket item. A lower than 550 rating will more than likely result in denials. Higher than 550, but lower than 650 to 680 may not limit credit approval but will result in higher interest rates and or other penalties assessed. Credit ratings from "Poor" to "Excellent" affect the amount of money you pay for using someone else's. Credit scores affect all types of loans, not just auto loans. The most prevalent defaults are those where consumers fail to make credit card payments. Student loans are also prevalent when it comes to defaults. Car loans are also ones that many consumers getting into financial struggle wind up failing to pay.

There is a huge difference between default and deferment. Default is a non-payment of an agreed upon monthly installment figure whereas deferment is a plan created between a lender and borrower that details payments are postponed for a certain time period. A deferment plan should be discussed with a lender and finance company if a default is imminent. There are many types of deferment plans that should not have a greatly adverse affect upon a consumer credit score. Keep in mind, all inquiry activity presented to reporting agencies does have an affect upon your credit score so making negotiations with your finance company may not involve any reporting agencies. Furthermore, while in negotiations with your finance company, no negative reports should be presented to any reporting agencies. This should help keep your credit score intact. The only time your credit score will become affected is when a default has officially been posted to your credit history. Although deferments will be posted, potential lenders see this as a proactive sign that you, as a consumer, are willing to accept responsibility and make arrangements to satisfy your loan. Sign of a default only indicates greater financial problems.

A default will stay on your credit history for up to 7 years. During this time, you will find it nearly impossible to secure traditional financing. You will be forced into the arena of "bad credit" offers that will include much higher costs. Many bad credit situations get people into loan agreements where the product financed will cost, in the end, a lot more than it is actually worth. Therefore, avoiding a default at all costs should be explored. Making an alternative arrangement with your creditor is best.