Car Loan Default And Delinquency: What's The Difference?

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January 27, 2012

Car loan default and loan delinquency are two separate things entirely. It's easier to get out of a delinquency. Both will report on your credit, but one is worse than the other. Here we will explore the difference between the two.

What Is a Delinquency?

When you first set up your car loan, you agreed to certain terms and conditions with the lenders. One of these terms was the date on which your payment would be received by you every month. If you fail to make the payment to the lender by the specified date then your car loan will become delinquent. Lenders will charge a fee to your account for a payment being late, and you will risk your interest rate increasing.

What Is a Default?

When you have not paid your payments, or have not paid them in full for a certain period, then the loan is considered defaulted. The car lender will have different conditions for a default depending on the bank. Most often though a car is considered to be in default status after being unpaid or underpaid for 90-120 days. When a car loan has defaulted, the lender reserves the right to take possession of the car and try to recoup the money they lost by selling it. You will still be held responsible for any amount of the overall loan that couldn't be recouped by the sale of the vehicle.

What Can I Do if I'm Late?

If you are late in making a payment, or can see that you will be late, you need to contact the lender and let them know. Some lenders can defer the payment for you (push the payment back out to the end of the loan, making your payoff one month later), or work with you another way. You still want to try your best to make the payment. Be prepared for a late fee that will be added to your account, usually on your next month's payment. Your interest rate will likely go up as well. As long as you make on-time payments for several months thereafter, you may be eligible to have this rate decreased back to the standard rate.

What If I Know I'm Going to Default?

An involuntary repossession will look worse than a voluntary one. If your circumstances have changed and you know you won't be able to make the payments anymore, your first step would be to try to refinance the current loan. You may be able to save enough on the monthly payments to be able to afford to keep the car. If that doesn't work out, then you should try to sell the car for the payoff amount. As a last resort you will want to contact the finance company and explain the situation to them. They will ask that you return the car to them. This will end up showing on your credit report, and will make it harder to find financing later on, but it still looks better on your report than if the lender repossesses the car.

Knowing the difference between a car loan default and delinquency is important. Being aware of the potential consequences concerning each one is essential when making payments.

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