What Happens If I Don’t Pay My Car Note?

A car loan is a secured debt, meaning the vehicle itself acts as collateral. Failing to meet loan agreement terms can lead to unfavorable outcomes, as the lender has the right to reclaim the asset.

Immediate Repercussions of Non-Payment

Most auto loans include a grace period, 10 to 15 days after the due date, during which a payment can be made without incurring late fees. Once this grace period expires, lenders commonly assess late fees, which can vary from $25 to $50 or be calculated as a percentage of the overdue balance, around 5%.

An immediate impact involves the borrower’s credit score. While late fees are applied promptly, a payment is not reported as delinquent to Experian, TransUnion, and Equifax until it is at least 30 days past due. Once reported, this missed payment negatively affects the credit score, making it more challenging to qualify for future credit or loans. Lenders will also initiate communication through phone calls, letters, or emails to collect the overdue amount.

Understanding Vehicle Repossession

Should a borrower continue to miss payments, the loan will eventually be considered in default, making the vehicle subject to repossession. While a lender can legally repossess a car after just one missed payment, most wait until the payment is 30 to 90 days past due before initiating the process. The exact timeline depends on the loan agreement and the lender’s policies.

Repossession occurs without prior warning, as lenders are not required to provide advance notice in many jurisdictions. A repossession agent, a third-party company, will seize the vehicle from locations such as a home, workplace, or public parking area. During the actual repossession, agents are prohibited from breaching the peace, meaning they cannot use threats, violence, or break into locked areas like a garage to take the vehicle. Borrowers are advised not to obstruct the repossession but can request to retrieve personal belongings from the vehicle, as these items do not belong to the lender.

Post-Repossession Financial Outcomes

After a vehicle is repossessed, the lender sells it to recover the outstanding loan balance. This sale occurs at a public auction or through a private sale. The proceeds are applied to the loan amount, but these sales do not generate enough funds to cover the full outstanding balance, along with the repossession and sale expenses.

The remaining amount owed, the difference between the sale price and the total debt (loan balance plus fees), is known as a “deficiency balance.” Lenders may pursue collection through various means, including collection agencies, and can file a lawsuit to obtain a judgment, leading to wage garnishment or bank levies. A repossession, along with any resulting deficiency balance, is reported to credit bureaus and can remain on a credit report for up to seven years from the date of the original delinquency. This negative mark significantly lowers the borrower’s credit score, making it much more difficult to secure future loans or credit, resulting in higher interest rates if approval is granted.

Strategies to Address Payment Difficulties

For borrowers facing challenges with car loan payments, proactive engagement with the lender helps avoid severe consequences. Contacting the lender as soon as financial difficulty arises allows for discussion of solutions before payments become significantly past due. Lenders may offer various options, such as loan modification, involving adjusting the interest rate, extending the loan term to reduce monthly payments, or changing the payment due date.

Another option is payment deferment or forbearance, allowing the borrower to temporarily skip or reduce payments for a set period, with these payments added to the end of the loan term. Refinancing the car loan, either with the current lender or a new one, can be considered to secure a lower interest rate or a longer repayment period, thereby reducing the monthly payment burden. As a last resort, voluntary surrender of the vehicle involves the borrower returning the car to the lender. While this action still negatively impacts credit and results in a deficiency balance, it can help avoid additional repossession fees and the abruptness of involuntary repossession. In some situations, exploring credit counseling or, in extreme cases, bankruptcy, can provide paths to address overwhelming debt and prevent or mitigate the impact of repossession.