If I Default on My Car Loan, What Happens?
Gain clarity on the full range of effects when you default on your vehicle loan agreement.
Defaulting on a car loan is a serious financial event with far-reaching consequences for borrowers. It signifies a failure to meet the agreed-upon obligations of the loan contract, triggering a series of actions by the lender. This article explores the stages and outcomes associated with defaulting on a car loan.
Defining Car Loan Default
A car loan default occurs when a borrower fails to adhere to the terms and conditions outlined in their loan agreement. While missed payments are the most common trigger, default can also be initiated by other contract violations. Loan agreements specify a grace period, usually 10 to 30 days, after a payment due date before a late payment is considered a default. Some contracts may allow a lender to declare a default immediately upon missing a single payment.
Beyond monetary obligations, loan agreements include covenants that, if breached, can lead to a default declaration. For instance, failing to maintain comprehensive and collision insurance coverage on the vehicle, as required by most lenders, constitutes a default. Selling the vehicle without the lender’s consent or moving it out of state without notifying the lender might also be deemed a breach of contract. The specific conditions that constitute a default are detailed within the original loan documentation.
The Vehicle Repossession Process
Once a car loan is in default, the lender has the right to repossess the vehicle, as the car serves as collateral for the loan. Repossession occurs without prior notice to the borrower, and the lender does not need a court order to take possession of the vehicle. A repossession agent can arrive at any time and take the car from a driveway, public street, or other accessible location.
Lenders can repossess a vehicle without advance warning, but they cannot engage in a “breach of peace” during the process. A breach of peace involves actions that disturb public order or violate an individual’s rights, such as using physical force, threats, or breaking into a locked garage or home to take the vehicle. If a repossession agent attempts to take a vehicle and the borrower verbally protests, the agent must stop the repossession to avoid a breach of peace.
The repossession company can seize the vehicle from locations like a driveway, yard, or public area, but they are prohibited from entering a closed garage or a borrower’s home without explicit permission. If personal belongings are inside the repossessed vehicle, the lender cannot keep or sell them. The borrower has a right to retrieve their personal property, and the lender must inform them how to do so within a certain timeframe.
Post-Repossession Financial Outcomes
After a vehicle is repossessed, the lender’s goal is to recover the outstanding loan balance and associated costs. The repossessed vehicle is sold, typically through a public auction or private sale. Before the sale, the lender is required to send the borrower a notice detailing the sale date and time, allowing the borrower an opportunity to bid or arrange for redemption.
The sale proceeds are applied first to repossession, storage, and sale expenses, including towing, administrative, and auction fees. Any remaining funds are then applied to the outstanding car loan balance. The sale price of a repossessed vehicle is often less than the remaining loan balance.
When sale proceeds do not cover the entire amount owed, including all fees and the principal loan balance, the remaining amount is known as a “deficiency balance.” The borrower remains legally responsible for this deficiency balance. The lender has the right to pursue collection of this deficiency balance from the borrower.
Credit and Legal Ramifications
Defaulting on a car loan and subsequent repossession can have significant impacts on a borrower’s credit report and financial standing. Even a single missed payment can be reported to major credit bureaus, negatively affecting the credit score. Once a loan defaults and the vehicle is repossessed, the repossession is recorded on the credit report, lowering the credit score and remaining for up to seven years from the initial delinquency date.
Beyond the immediate credit score impact, a defaulted and repossessed loan is reported as a “charge-off” by the lender, indicating the debt is unlikely to be collected. This damages the credit profile, signaling a high risk of non-payment to future creditors. A repossession and charge-off on a credit report can make it challenging to obtain new credit, such as mortgages, other car loans, or rental housing, resulting in higher interest rates or denial of applications.