What Happens If I Stop Making Car Payments?

Stopping car payments violates the car loan agreement, which is formally known as defaulting on the loan. This action carries significant repercussions that extend beyond simply losing access to the vehicle, negatively impacting a borrower’s financial standing and future borrowing capacity.

Initial Impact and Lender Actions

The immediate consequence of missing a car payment is often the assessment of late fees. While some loan agreements may include a grace period, typically ranging from 10 to 15 days, fees are usually applied once this period expires. These late fees can vary, sometimes being a flat amount, such as $25 to $50, or a percentage of the overdue payment, potentially adding a notable amount to the outstanding balance.

A missed payment, especially if it extends beyond 30 days, can significantly impact a borrower’s credit score. Creditors generally report payments that are 30 days or more past due to major credit bureaus, and payment history is a primary factor in credit scoring models. This negative mark can remain on a credit report for up to seven years, making it difficult to secure new loans or favorable interest rates in the future.

Lenders typically initiate communication with the borrower soon after a payment is missed. This communication may include phone calls, letters, or emails, attempting to resolve the delinquency. If payments continue to be missed, the loan will formally be considered in default, a status defined by the specific terms in the loan contract. This declaration of default empowers the lender to pursue more serious actions, including repossession of the vehicle.

Understanding Vehicle Repossession

Once a car loan is in default, the lender typically has the legal right to repossess the vehicle without a court order or prior notice. Repossession agencies are commonly employed to carry out this process, which can involve towing the vehicle from a borrower’s driveway, workplace, or any public location.

The timing of repossession can vary, but it can occur relatively quickly after a loan enters default. While some lenders may wait until a payment is 30 to 90 days past due, it is possible for repossession to be initiated after just one missed payment, depending on the loan agreement and state regulations. Lenders are generally not required to provide advance warning of the repossession itself, although they cannot “breach the peace” by using physical force, threatening violence, or entering a locked garage without permission during the process.

Borrowers are generally entitled to retrieve personal belongings left inside the vehicle. The lender is also typically required to send specific notifications, such as a “Notice of Intent to Sell Vehicle,” which informs the borrower about how to retrieve the vehicle, the outstanding amount needed to do so, and the details of a potential sale. This notice usually provides the time, date, and location if the car will be sold at a public auction, or the date after which a private sale will occur. The repossessed vehicle is commonly sold at an auction or through a private sale to recover the outstanding debt.

Post-Repossession Financial Obligations

After a vehicle has been repossessed and sold, borrowers may still face significant financial obligations. This remaining amount is known as a “deficiency balance”. The deficiency balance is calculated by subtracting the sale proceeds from the total amount owed on the loan, which includes the principal balance, any accrued interest, late fees, and expenses incurred during the repossession, storage, and sale of the vehicle. For example, if a borrower owes $12,000, and the repossessed car sells for $3,500 with $150 in repossession and auction fees, the deficiency balance would be $8,650.

Lenders will typically pursue collection of this deficiency balance. This often involves sending collection letters and making phone calls, possibly through a third-party debt collection agency. If the borrower does not pay, the lender can escalate efforts by filing a lawsuit to obtain a deficiency judgment against the borrower. A judgment provides the lender with legal tools to collect the debt, which may include wage garnishment, where a portion of the borrower’s paycheck is legally withheld, or bank levies, allowing the lender to seize funds directly from the borrower’s bank accounts. In some cases, a lien might even be placed on other property owned by the borrower.

The impact of a repossession and a deficiency balance extends to a borrower’s credit report. Both the repossession itself and any resulting deficiency judgment are reported to credit bureaus and can remain on the credit report for up to seven years. This can severely impair the borrower’s ability to obtain future credit, including mortgages, other car loans, or even rental housing. Furthermore, if a portion of the deficiency balance is ultimately forgiven by the lender, this amount might be considered taxable income by the Internal Revenue Service (IRS), potentially leading to unexpected tax liabilities for the borrower.