What Happens If You Don’t Make Car Payments?

When a person takes out a car loan, they agree to make regular payments covering the principal and interest. Defaulting on this agreement can lead to serious consequences beyond losing the vehicle. Understanding these potential outcomes can help individuals grasp the full weight of their loan responsibilities.

Immediate Repercussions of Non-Payment

Missing a car payment leads to immediate actions from the lender. Most auto loans include a grace period, often 10 to 15 days, to make a payment without a late fee. If payment is not received within this period, a late fee is assessed, adding to the balance.

A negative impact on the borrower’s credit report follows. While a payment might not be reported as late to national credit bureaus until 30 days past due, it can significantly lower a credit score once reported. Lenders contact borrowers about missed payments through various methods, including phone calls, emails, and letters. The loan agreement defines when an account is in default, which can be triggered by a single missed payment.

Understanding Vehicle Repossession

Vehicle repossession occurs when a lender takes back a car due to loan default. While some contracts allow repossession after one missed payment, lenders often wait until a borrower is 30 to 90 days past due. As a car loan is secured debt, the vehicle serves as collateral, giving the lender the right to seize it if payments are not met.

Repossession can be involuntary, by a third-party agent, or voluntary surrender by the borrower. In many states, lenders do not need to provide advance notice before repossessing a vehicle. Agents can take the car from public areas or a borrower’s property without a court order. However, agents cannot “breach the peace,” meaning they cannot use physical force, threaten individuals, or enter locked garages without permission. Some lenders use electronic disabling devices that prevent the car from starting if payments are not made.

After the Vehicle is Repossessed

Once a vehicle is repossessed, the lender aims to recover the outstanding loan balance. They do this by selling the vehicle, usually at a public auction or private sale. Proceeds from the sale are applied to the loan account, along with repossession and sale costs.

The sale price of a repossessed vehicle is often less than the remaining loan balance, as auction prices are typically lower than market value. If sale proceeds do not cover the full amount owed, including fees, the borrower is left with a “deficiency balance.” For example, if a borrower owed $12,000 and the car sold for $3,500, with $150 in fees, the deficiency balance would be $8,650. The borrower must still pay this balance even after the car is gone.

Broader Financial and Legal Consequences

Defaulting on a car loan and vehicle repossession significantly impact a borrower’s financial future. A repossession, along with late payments and loan default, is reported to credit bureaus and can severely damage a credit score, potentially dropping 100 points or more. This negative mark stays on a credit report for up to seven years from the initial delinquency, making it harder to obtain future loans or credit at favorable terms. Lenders view the borrower as a higher risk, leading to higher interest rates or stricter approval for mortgages, other vehicle loans, or credit cards.

Beyond credit score damage, lenders can pursue legal action to collect any remaining deficiency balance. If a lawsuit is successful, the lender may obtain a judgment against the borrower, leading to aggressive collection methods. These include wage garnishment, where earnings are withheld to repay debt, or bank account levies, seizing funds directly from accounts. If the car loan had a co-signer, their credit is also negatively impacted, and they share responsibility for the deficiency balance.