Car Loan Defaults: Things You Should Know

A car loan default is a serious black mark on your credit score, and can also leave you without a vehicle to drive. When you get a car loan, the creditor can seize the vehicle, commonly known as repossession, when you miss a payment. Some contracts give them the right to do this after only one missed payment, while some creditors will wait until you miss two or three. It's important to read the fine print of your loan agreement so you'll understand the potential consequences of a car loan default.

This is the first step the creditor will take if you go into car loan default. Most states allow a creditor to come onto your property and seize the vehicle without advance notice. They don't have to contact you at all, but you do have some rights in the case of car repossession. The creditor can't physically threaten you or anyone while taking the car. This is considered a "breach of peace," and they can't go into your residence or a closed garage to take the car. Breaking into a garage, for instance, would be an illegal repossession. If you have any personal property in the car that's repossessed, they have to let you know the items that were in the car and allow you to retrieve them. They cannot be kept or sold.

If a creditor commits a breach of peace when repossessing your car after your car loan default, you may be able to take them to court for compensation. This can typically be done if you were injured or your property was damaged. In some cases, you may be able to sue for the difference between the amount you owe and what the creditor will get when your vehicle is resold. This is known as a deficiency judgment.

After your car loan default and the repossession, the creditor will most likely resell the vehicle. Laws vary by state, but most states require that the creditor inform you of the resale date, whether it's a public auction or a private sale. You can go to a public auction and join in on the bidding to get your car back. If the car is sold for less than the amount you owed on it, you can be forced to pay the difference.

You can keep the car from being resold by redeeming your debt, but you'll have to pay the total amount that you already owe, plus the amount that was left on the debt when you went into car loan default. You'll also have to pay the extra costs and fees associated with the creditor having to repossess the car, like storage and attorney fees.

In some states, you can essentially start over by reinstating the loan. You'll have pay the amount you owe plus any of the fees associated with the repossession. Then you can get the car back and still have the original loan payments, without having to pay the entire amount of the loan at one time. In this situation, of course, you will have to make your future car loan payments on time to avoid another car loan default.