How to Deal with an Auto Loan Cancellation

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, - May 25, 2016

An auto loan cancellation can be extremely disruptive, and it is essential that the underlying causes are addressed in detail. Whether the loan has been terminated by the bank or finance company, or the auto buyer wishes to cancel the loan and return the vehicle, there are explicit strategies that should be followed to insure a favorable outcome.

Usually when a bank or finance company initiates a loan cancellation, there is almost always an underlying event of some kind that instigated the process. Remember that loan agreements have very specific language that spells out the terms under which the buyer is considered negligent, and it almost always favors the lender. For example, most contracts are written so that even if one car loan payment is past due, the purchaser is considered technically to be in default.

Failing to address these kinds of situations aggressively may have extremely negative consequences. Loan cancellation, either from the bank or the buyer, should be avoided whenever possible. It is important to recognize that even in a vehicle repossession, the loan obligation will still remain regardless of the fact that the bank or dealer now owns the vehicle. In fact, the eventual outcome is probably a legal judgment against the defaulting party and a significant reduction in the purchaser’s credit score.

Instead, consider negotiating with the bank or finance company for more lenient terms as soon as the delinquency becomes apparent. There is an advantage in knowing neither the bank nor the auto dealer wants the vehicle back again. If there is simply no way to make any sort of realistic payment arrangement, ask the bank to relinquish their rights to collect the balance of the debt and insure that no negative consequences will appear on a credit report if the vehicle is returned voluntarily. They will often agree to this arrangement because it saves them significant expense in legal and repossession fees.

At the very least, try and negotiate a settlement figure with the bank and satisfy the obligation through the sale of the vehicle to a third party. If having the vehicle for transportation is absolutely essential, look at the possibility of tapping into a line of credit, while recognizing these sorts of loans are very difficult to obtain in this economy. Withdrawing or borrowing against retirement funds carries penalties and tax implications, and should only be done after consulting a professional.

The most critical aspect of auto loan cancellation is avoiding it in the first place. For those with excellent credit, this can be accomplished by selecting lenders with a strong balance sheet and a solid reputation. For those living on a tight budget, placing 20% down and avoiding car loan terms longer that five years, while never committing more than 20% of after tax income to an auto loan, will insure that that payments remain current and the loan will affect the credit rating in a positive manner.

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