What Happens If You Default on a Car Loan?

When a borrower fails to meet the terms of a car loan agreement, the loan is considered in default. This can trigger significant financial consequences. Understanding these stages is important for anyone facing difficulties with car payments.

The Initial Stages of Default

A car loan enters default not only from missed payments but also from other contract breaches, such as failing to maintain required insurance. After a missed payment, the loan becomes delinquent. Lenders often allow a grace period, usually 10 to 15 days, before assessing late fees.

If the payment remains unpaid, most lenders report the delinquency to major credit bureaus after 30 days. The official declaration of default varies; some lenders consider a loan in default after one missed payment, while others wait 30 to 90 days. Borrowers typically receive initial communications from the lender, including late payment notices, reminder calls, and demand letters, serving as warning signs before more severe actions.

Vehicle Repossession

Once a loan is in default, the lender may proceed with vehicle repossession, as the car serves as collateral. A repossession agent typically carries out this act, often without prior notice to the borrower. Lenders can take the vehicle from public places or open driveways without a court order, but they cannot “breach the peace” by using physical force, threats, or breaking into locked garages.

If personal belongings are inside the repossessed vehicle, the borrower has the right to retrieve them, as the lender’s interest is solely in the vehicle. The repossession agency must provide notice, often within 48 hours, detailing the vehicle’s seizure and listing any personal possessions found. The borrower must then arrange to collect these items; the company cannot charge a fee for their return.

After Repossession: Sale and Deficiency

After a vehicle is repossessed, the lender sells it to recoup the outstanding loan balance. This sale must be conducted in a “commercially reasonable manner” to obtain a fair value for the vehicle. Common methods include public auctions or private sales.

The sale proceeds are applied to the loan balance, but often, the sale price does not cover the full amount owed, especially due to rapid vehicle depreciation. Costs associated with repossession, storage, and sale are added to the outstanding balance. The remaining amount, if sale proceeds are insufficient, is known as a “deficiency balance.”

Borrowers receive notice of the sale, including its date, time, and location, and are informed of their potential liability for any deficiency. Borrowers may have the right to “redeem” the vehicle by paying the entire outstanding loan balance plus all associated costs before the sale. Another option is “reinstatement,” which involves paying only past-due amounts and fees to resume the original loan terms.

Dealing with the Deficiency Balance

If a deficiency balance remains after the vehicle’s sale, the lender will pursue collection. This typically begins with collection calls and letters from the lender or a third-party collection agency. If the deficiency is not paid, the lender may initiate legal action by filing a lawsuit to obtain a judgment against the borrower.

A judgment legally declares that the borrower owes a specific amount to the lender. With a judgment, the lender gains additional powers to collect the debt, including wage garnishment or bank account levies. Liens on other property may also be imposed. Borrowers may have options such as negotiating a settlement with the lender, often for a reduced amount, or setting up a payment plan.

Long-Term Financial Consequences

A car loan default and subsequent repossession can have significant and lasting effects on a borrower’s financial health. The most immediate impact is a substantial drop in the credit score. Missed payments, repossession, and any deficiency judgments are reported to major credit bureaus and appear as negative marks on the credit report.

These derogatory marks can remain on a credit report for up to seven years from the date of the first missed payment that led to the default. This extended presence can severely hinder the ability to obtain new credit, such as other car loans, mortgages, or credit cards. When credit is available, it often comes with higher interest rates and less favorable terms due to increased risk.