What Happens If I Don’t Pay My Car Loan? (2024)

FAQs

What Happens If I Don’t Pay My Car Loan? ›

If you don't pay, the lender can sue you. If you don't have a defense to the deficiency, the lender will get a judgment against you. Once the lender has a judgment, in most cases, it can use various methods to collect it, including garnishing your wages or taking funds from your bank account.

If you don't pay your auto loan, your car will eventually be repossessed. When you miss payments, you'll face late payment fees, a lower credit score, and possibly repossession charges. Some lenders may be able to offer you better terms on your car loan or lower your payments if you can repay your auto loan.

Refinance Your Car Loan

Depending on your situation, you may be able to get a loan with a longer repayment term than what you have left on your current term, which can help reduce your monthly payments. For example, if you have 24 months left on your auto loan, you could refinance with a 36-month loan.

Auto Loan Forgiveness:Directly Contact Your Lender: The first step is to reach out to your car loan lender and explain your situation. Be honest about your disability and inability to afford the payments. Many lenders offer hardship programs or loan modifications for borrowers facing financial difficulties.

But if you can no longer afford your monthly payments or are on the verge of becoming upside down on your loan, there are ways out. If you bought your vehicle, you could renegotiate or refinance your loan or sell the car. You may be able to transfer a lease to someone else or pony up a fee to exit it early.

Although voluntary repossession is a better option than having your vehicle repossessed against your will, it will negatively impact your credit score and history. For that reason, you should first consider other ways to make payments or give up your vehicle.

Under California law, your lender can repossess your vehicle the instant you default on your loan terms. Depending on your financing agreement, default could mean being one or more days late on your payments or paying less than the full payment amount.

Two or three consecutive missed payments can lead to repossession, which damages your credit score. And some lenders have adopted technology to remotely disable cars after even one missed payment. You have options to handle a missed payment, and your lender will likely work with you to find a solution.

According to our research, you shouldn't spend more than 10% to 15% of your net monthly income on car payments. Your total vehicle costs, including loan payments and insurance, should total no more than 20%. You can use a car loan calculator to calculate a monthly payment within your budget.

Each lender will have a different policy for deferment, so the exact number of times you can defer a car payment will vary. It may be that your lender only allows one deferment, others could allow two or even more.

Who qualifies for debt forgiveness? ›

Borrowers with undergraduate debt would qualify for forgiveness if they entered repayment 20 years ago or more, and borrowers with graduate school debt would qualify for forgiveness if they entered repayment 25 years ago or more.

Settle your loan

An auto loan is secured by your vehicle — that means if you can't pay, your lender can repossess your car. However, if the lender decides the repossession process isn't worth the effort, they might agree to a settlement if you make your case.

You may be eligible for income-driven repayment (IDR) loan forgiveness if you've have been in repayment for 20 or 25 years. An IDR plan bases your monthly payment on your income and family size.

Voluntary repossession can make obtaining future loans more difficult. There is no difference on your credit between a voluntary repossession and an involuntary one. Future lenders may see this action as a risk factor, making them more reluctant to lend to you or offer you higher interest rates.

Having your car repossessed or surrendering it voluntarily is seen as a major negative event by lenders. They'll view you as high-risk. Expect your credit score to take a big hit, maybe over 100 points or more. That makes getting approved for financing in the future much harder.

A repossession typically stays on credit reports for seven years. However, you can take steps to improve your credit before the seven-year period ends. Making consistent smart financial decisions over time, such as responsibly using credit cards, can help steer your credit in the right direction.

The lender may be more lenient if you have an otherwise good payment history. A defaulted car loan will show on your credit reports for seven years from the point the account became delinquent and was never again brought current.

One reason many people consider voluntary repossession is to protect their credit score. Unfortunately, giving your car to your lender is unlikely to protect your credit. Many lenders consider a voluntary repossession the same as an involuntary repossession, leading to a negative mark on your credit report.

Even falling one payment behind is enough for a lender to repossess your car. Usually, a loan is two or three months behind before the lender initiates a repossession. At that point, the lender can seize the vehicle, often without warning, and then sell it to recover the loan balance.