How a Car Loan Payment Affects Your Credit Score

May 23, 2013

People fall behind on auto loans for a variety of reasons, especially in tough economic times. What you might not know, though, is that a single missed payment might drop your credit score by as much as 100 points -- and the situation only gets worse from there.

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Because of this, it's important to take swift action, even when you're not yet in trouble.

If you anticipate reduced income, for instance, and believe you'll have trouble making payments on an ongoing basis, you must think proactively.

Explore Refinancing
If your existing loan has a high percentage rate, but you have decent credit, refinancing at a lower rate can reduce your monthly payment. When this happens, your new lender pays your old lender and you start fresh with a new loan.

Be aware that this option can entail a pre-payment penalty, usually the amount of interest left on the existing loan. If you have a relatively new loan, and the penalty is high, refinancing might not make sense for you.

Trade Your Car In
If your circumstances have changed for the worse and you're driving a luxury car purchased when times were better, consider trading it in for a less expensive economy car. Heated leather seats and surround sound stereos aren't necessary. If you find yourself struggling to make car payments, this is a good option to explore.

If a missed payment is in your immediate future, you need to do something quickly.

Call the Lender
When you miss payments, your lender can repossess your car without providing any advance notice. This is their least favorite option. But if you don't make a payment, and don't explain why, you give the impression that you're willfully ignoring them and unconcerned about paying your debt.

So communicate with your lender -- you might be surprised at how helpful they can be. A lender wants to avoid the hassle and expense of repossession, resale and collecting whatever you still owe. In most cases, it's cheaper for them to make arrangements that enable you to keep the car.

When you realize your payment will be late, call the lender and request an extension. If you've been paying regularly without previous problems, they may opt to waive a late fee, or let you skip the payment entirely -- tacking it instead onto the end of your loan term.

But what if you're already late on your payments and have been avoiding contact? You should still call. Open lines of communication will get you farther than any other option.

Make the Payment
When your lender gives you extra time to make a payment, do everything you can to meet your obligation by the new due date. In fact, you shouldn't agree to that date if you don't think you can follow through.

Surrender the Car
Should you find yourself perpetually behind on payments, and unable to catch up, it might be best to return the car voluntarily. When you surrender the car because you can't make payments, you avoid some of the negative repercussions default and repossession can have on your credit report.

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