What Happens If I Stop Paying My Car Loan?

When you finance a vehicle, the car itself serves as collateral for the loan. This means the lender holds a legal claim to the asset until the loan is fully repaid. Failing to meet your payment obligations can lead to significant financial repercussions.

Missing Payments and Lender Communication

When you miss a car loan payment, your lender takes specific steps. Many auto loans include a grace period, typically 10 to 15 days, allowing you to pay without late fees. After this period, lenders usually assess a late fee, often between $25 and $50, depending on the loan agreement.

A payment over 30 days late is reported to major credit bureaus, negatively impacting your credit score. Lenders will also initiate communication, reaching out via phone, letters, and emails to resolve the overdue amount. These contacts aim to bring the account current and may offer temporary payment arrangements, though such flexibility depends on the lender and your specific situation.

Vehicle Repossession

If missed payments continue, the lender may proceed with vehicle repossession. Lenders often have the legal right to repossess a vehicle as soon as a loan is in default, even without prior notice. However, lenders and their agents cannot “breach the peace” during seizure. This means they cannot use physical force, threaten violence, or remove the vehicle from a closed garage without permission.

Repossession involves a third-party company hired by the lender to locate and tow the vehicle. After repossession, the lender must provide specific notices to the borrower. These notices detail the outstanding balance, redemption options, and information about the vehicle’s impending sale. Unlike pre-repossession warnings, these post-repossession notices are required.

Addressing the Remaining Debt

After repossession, the lender sells the vehicle, usually through a public auction or private sale. The sale proceeds are applied to the loan, but the amount is often less than the total debt owed. This shortfall happens because repossessed vehicles typically sell for less than their market value, especially after accounting for repossession and sale expenses.

The remaining amount after the sale proceeds and additional fees, like repossession and auction costs, is called a “deficiency balance.” For example, if you owed $12,000 and the car sold for $3,500 with $150 in fees, you would still owe $8,650. Lenders can pursue collection of this deficiency balance. This may involve demands for payment, turning the debt over to collection agencies, or filing a lawsuit to obtain a judgment, potentially leading to wage garnishments or bank account freezes.

Long-Term Financial Consequences

Defaulting on a car loan has significant financial consequences, primarily affecting your creditworthiness. Missed payments, the repossession, and any collection activities or lawsuits for a deficiency balance are recorded on your credit report. Payment history is a major factor in credit scoring, accounting for 35% of your FICO score, so a default can cause a considerable score drop.

A repossession remains on your credit report for seven years, starting from the first missed payment that led to the default. This negative mark makes it harder to obtain new loans, like car loans, mortgages, or personal loans, and can impact credit card eligibility. A lower credit score also influences other financial aspects, including higher interest rates on future credit, increased insurance premiums, and difficulties with rental applications.