Car Loan Defaults: 5 Noteworthy Facts

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The CarsDirect editorial team is dedicated to providing our readers with the latest on new and used cars, expert opinions on which vehicles make the grade, and all the fun stuff in between.


, - May 25, 2016

A car loan default can have serious repercussions that take years to overcome. Before entering into an auto loan agreement, consider these five facts about car loan defaults.

1. Missed Payment = More than 30 Days Late

A missed payment is defined as a payment that is more than 30 days late. Most banks give a 10-day grace period on car payments before they even consider them late. Between 10 and 30 days late, your only consequence will likely be a late fee. However, once the billing period has rolled around to the next payment due, the bank considers your payment as missed. You have now defaulted on your car loan.

2. Vehicle Repossession

A single missed payment can result in a car repossession. If your car loan is secured by the vehicle you financed, then the bank has the right to take your car if you miss a payment. It is very difficult to avoid repossession. If you park your vehicle in the garage at night, a tow truck will follow you during the day and hook it up while you’re shopping or working. Because repo tow truck drivers are paid by the vehicle, they can be very quick. Some are able to hook up your car while you’re inside a gas station paying for gas.

3. Damaged Credit Score

If you miss a payment, the bank will report you to the credit agencies. A car loan default can have a serious impact on your overall credit score. You may be able to negotiate with the bank and avoid this. Try calling before your pay period rolls around and make new payment arrangements.

4. Leniency

Banks are more likely to show leniency after a year of on-time payments. Within the first year, banks are quick to report you to the credit agencies and repossess your vehicle if you miss a payment. After a year of reliable, on-time payments, the bank is much more likely to give you extended grace periods or renegotiate your repayment plan.

5. State Laws on Bankruptcy Protection

In some states, filing for bankruptcy may be an option to protect you from repossession of your vehicle. However, not every state is alike, so it's important to check the laws in your state before you take this action. Consult with a local bankruptcy attorney to see if this is an option for you.

Auto loans are a blessing and a curse. On the one hand, they provide you with the thousands – or tens of thousands – of dollars you need to buy a car. On the other hand, one car loan default can result in car repossession and a lower overall credit score. When applying for a car loan, remember to buy within your means to avoid defaulting later. If you find yourself in an unexpected budget crunch, do everything you can to avoid car loan default, especially within the first year, or negotiate with the bank on a new payment plan.

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The CarsDirect editorial team is dedicated to providing our readers with the latest on new and used cars, expert opinions on which vehicles make the grade, and all the fun stuff in between.


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