Defaulting on a Car Loan: The Effects of a Car Loan Default

November 6, 2013

Whenever possible, avoid defaulting on a car loan by deferring the law. Learn more about the consquences of a car loan default vs. a deferment.

Car Loan Default

A car loan default is the failure 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.

How Defaulting on a Car Loan Affects Your Credit Score
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.

See more on Default vs. Delinquency >>

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.

Car Loan Default vs. Deferment
There is a huge difference between default and deferment. Default is a non-payment of an agreed upon monthly installment figure whereas a car loan 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 effect upon your credit score so making negotiations with your finance company may not involve any reporting agencies.

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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.

Amount of Effect
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.

Understanding Car Repossession
Car repossession is employed by banks in situations where clients do not pay back the car loan in time. The banks are granted the power of repossessing vehicles owned by their clients by the state governments, and while the specific legal features vary from state to state, there are some standard legal provisions that allow banks to take this measure when necessary.

The repossession of a car is possible if the bank in question has a security interest stake in the car. These interest stakes are granted to the bank when a client applies for a car loan with the bank. Automobile loans in most states are granted with the car itself being used as collateral.

The Certificate of Title is filed for with the state and has an "interest" mentioned upon it. This interest is granted in favor of the bank when the bank lends money to the vehicle purchaser. Hence, the car becomes the collateral against which the loan is taken out, and the bank has the right to repossess the vehicle.

Most banks first issue a notice to the client informing him or her about the defaulted payment and giving them a chance to submit the loan payment within a designated period. Since the deadline for the loan amount has already passed, most banks give a minimum time period of around a week after they issue the notice. If the individual is unable to meet the payment even after the notice is sent out, the bank can choose to claim the vehicle.

Dealing with Impending Car Repossession
Once an individual has received the notice to pay back the loan, he or she has a period of around seven days to return the money to the bank. If one is not able to meet this deadline and does not have the required finances, there are very few legal measures that can be take,. The first option is to negotiate one on one with the lender. Some lenders are sympathetic to the situation of their borrowers and can agree to lower the amount of payment to be made per loan, or can agree to extend the time limit of the payback period.

In the possible event that the bank is not willing to negotiate, there is a very great chance that the borrower will be taken to court. Once this course of action is adopted by the lender, it's up to the court to decide what the borrower has to do. The court can decide in favor of the borrower and grant him or her more time to pay the money back in reduced installments.

Under the event that the individual has paid back more than 1/3 of the money, the lending company cannot repossess the vehicle without a court permit. Even if the borrower has paid back less than 1/3 of the sum, the lenders cannot enter the borrower's residence or other property to repossess the vehicle without a valid court permit.

Breach of Peace
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.

Resale
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.

Redeem the Debt
You can keep the car from being resold by redeeming your debt, but you'll have to pay the total amount 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.

Reinstate the Loan
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.

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