Default Car Loan: What Happens Next

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, - May 25, 2016

Anyone who finds themselves unable to make car loan payments will need to know what happens should they decide to default on their loan. There are a few possible scenarios depending on the circumstances, but in general, it's safe to say that being forced to default on a loan is not an ideal position. Sometimes there's no other choice. If you've had to default on a loan, or if you're considering defaulting for whatever reason, you should be aware of the consequences and what happens next.


Car dealers want you to keep your car because they receive a percentage of interest from the lender. As such, they will be willing to help you in order to prevent you from defaulting on your loan if at all possible. If you're deciding whether or not to default, you should first call the car dealership and see if they can help you refinance to suit your needs.

Impact on Credit

If you default on a loan, it will be recorded on your credit for up to the next 7 years. This will drastically lower your score and give future potential lenders an excellent reason to deny you loans, or to charge exorbitant rates. Even if a history of financial responsibility is established after recovering from the default, there is no way to erase it from your records until 7 years have passed.


If you can't refinance to avoid defaulting, your car will have to be repossessed by the lender. You will have lost any payments you've already made, including the down payment, which will not be refunded. If you don't own any other cars, you will find it very difficult to commute without the aid of public transportation, as no lender will be willing to provide the money for you to get another car. The only good news is that once your car has been repossessed, you no longer carry the remainder of the debt.

Lasting Consequences

Unfortunately, defaulting on your car loan will likely haunt you for the next 7 years at the very least, no matter how responsible you become afterward. With your credit history temporarily damaged, you will be considered a big risk and will have a very difficult time finding loans for any purpose. Alternatively, you may be forced to settle for loans with exorbitant interest rates. If you don't have a backup car or easy access to public transportation, it will likely be more difficult to get to work and make money towards another car. This vicious circle can persist indefinitely. For this reason, defaulting on a loan is a very serious thing which should be avoided if any other options are available.

To avoid defaulting on a car loan, it may be possible to refinance with the car dealership from which you bought your car. If you do end up defaulting, your financial life can become very difficult over the next 7 years or so. Although defaulting on a loan will clear you of the debt, the future consequences are severe.


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