What Happens If I Can’t Pay My Car Loan?

Facing financial difficulties, especially with car loan payments, can be unsettling. Many car owners experience anxiety when struggling to make monthly payments. This situation raises questions about next steps and potential consequences.

Understanding Loan Default

A car loan enters default when payments are missed for a specific period. Some lenders consider default after 30 days, but it is often triggered after 60 or 90 days of non-payment. A loan can also default if other terms of the agreement are violated, such as failing to maintain required insurance coverage.

The immediate consequences for a borrower entering default include late fees and penalties. Most lenders offer a grace period of 10 to 15 days before assessing late fees, which can be a flat amount or a percentage of the overdue payment. Defaulting severely damages a borrower’s credit score. Each missed payment, reported to major credit bureaus (Experian, TransUnion, and Equifax) after 30 days, negatively affects credit history and remains on a credit report for up to seven years. This credit damage can make it much harder to obtain future loans or credit at favorable interest rates.

The 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 secured loan. Repossession can occur without a court order in most jurisdictions, provided it is done without a “breach of the peace.” This means the repossession agent cannot use force, threats, or break into a locked garage. However, a vehicle can be repossessed from private property, such as a driveway, without direct permission, as long as no physical confrontation or disturbance occurs.

While some states may require the lender to send a “notice of intent to repossess” or a “right to cure” notice (e.g., 10 to 20 days), other states do not mandate prior notice before repossession. Repossession agents use tow trucks to take the vehicle, and this can happen at any time and from various locations where the car is found. If personal property is inside the repossessed vehicle, the borrower has the right to retrieve these items, and the lender cannot keep or sell them. The lender is required to provide information on how to reclaim personal belongings, often within a set period like 30 to 45 days.

After Repossession

After a vehicle has been repossessed, the lender prepares to sell it to recover the outstanding loan balance. This sale occurs through a public auction or a private sale. Before the sale, the lender is required to send the borrower a notice of sale, which includes details like the time and place of the sale and information on the borrower’s right to redeem the vehicle. Redemption involves paying the full outstanding loan balance, along with repossession and storage costs, before the sale takes place.

A common outcome after the sale is a “deficiency balance.” This occurs when the sale price of the repossessed vehicle is less than the amount still owed on the loan, plus any additional costs incurred by the lender for repossession, storage, and sale. For example, if $10,000 is owed but the car sells for $6,000 with $1,000 in repossession costs, the borrower would still owe a $5,000 deficiency. The borrower remains responsible for this balance.

If the borrower fails to pay the deficiency, the lender may sell the debt to a collection agency or pursue legal action, which could lead to wage garnishment or bank account levies depending on jurisdiction. A repossession, along with any resulting deficiency judgment or collection account, is a severe negative mark that remains on a credit report for up to seven years.

Managing Payment Challenges

When anticipating or experiencing difficulty making car loan payments, taking proactive steps can help mitigate severe consequences. The first action is to communicate directly with the lender as soon as a payment challenge arises. Lenders prefer to work with borrowers to avoid the costly and time-consuming process of repossession.

One potential option is a payment deferral or forbearance, which allows a borrower to temporarily skip or reduce payments for a period, with those payments added to the end of the loan term. Interest continues to accrue during the deferral period, which can increase the total cost of the loan. Another possibility is a loan modification, where the lender agrees to change the existing loan terms, such as extending the loan period to lower monthly payments or adjusting the interest rate. Refinancing the car loan can also reduce monthly payments if a borrower qualifies for a lower interest rate or a longer repayment term, assuming their credit has improved or interest rates have dropped.