How Many Car Payments Can You Miss Before Repossession?
Understand the timeline for car loan default, the repossession process, and the significant financial and credit consequences.
A car loan is a contract where a borrower agrees to repay a specified amount, plus interest, over time. The vehicle serves as collateral for the loan. Timely payments are crucial to avoid complications.
Initial Impact of Missed Payments
Missing even a single car payment can trigger immediate financial consequences for the borrower. Most auto loan agreements include a grace period, often ranging from 10 to 15 days, allowing for a payment to be made without incurring penalties. After this grace period expires, lenders typically assess late fees, which can range from $25 to $50, or a percentage of the overdue amount, such as 5%.
Beyond monetary charges, a payment 30 days past due is reported to major credit bureaus. This negatively impacts the borrower’s credit score. A lower credit score can affect future borrowing opportunities and interest rates on new loans.
Defining Loan Default
The point at which a car loan is considered in “default” is defined within each loan agreement. While some contracts allow for default after a single missed payment, most lenders consider a loan in default when it is 30 to 90 days past due. This timeframe indicates a breach of the loan terms.
Once a loan reaches default, the lender can pursue further action, including repossession. The exact number of missed payments or days past due that triggers default is stated in the loan contract. Borrowers should understand these terms to know their obligations and risks.
The Repossession Process
Upon a loan entering default, the lender typically has the right to repossess the vehicle without a court order in most jurisdictions. This process often occurs without prior notice to the borrower, and a repossession company is dispatched to seize the vehicle. While lenders can take the car from public spaces or open driveways, they are generally prohibited from “breaching the peace” during the repossession, which means they cannot use force, threats, or break into locked garages.
After the vehicle is repossessed, the lender’s primary goal is to recover the outstanding loan balance. The repossessed car is usually sold, often at a public auction or through a private sale. The proceeds from this sale are then applied to the borrower’s outstanding debt, along with any costs incurred during the repossession process.
Financial Implications After Repossession
Even after a car is repossessed and sold, a borrower may still owe money to the lender, a concept known as a “deficiency balance.” This balance represents the difference between the amount owed on the loan, plus repossession and sale costs, and the price the vehicle sold for. For example, if $15,000 was owed and the car sold for $10,000, the borrower would still be liable for the $5,000 difference, plus associated fees.
Lenders can pursue collection of this deficiency balance, which may involve demand letters, collection agencies, or lawsuits. A car repossession negatively impacts a borrower’s credit score, typically remaining on credit reports for up to seven years from the first missed payment. This mark impairs the borrower’s ability to obtain new credit, such as future car loans or mortgages, and can result in higher interest rates.