What Happens If You Don’t Pay a Car Loan?

Not paying a car loan can lead to serious financial repercussions that extend beyond simply losing the vehicle. A car loan is a secured debt, meaning the vehicle itself serves as collateral for the loan. This arrangement allows the lender to seize the car if the borrower fails to uphold their repayment agreement. Failing to make timely payments can trigger a cascade of negative outcomes.

Immediate Consequences of Missed Payments

When a car loan payment is missed, the immediate repercussions begin with late fees. Lenders impose these fees once a payment passes a specific grace period, which ranges from 5 to 15 days after the due date. This penalty is detailed in the loan agreement.

Beyond fees, a missed payment significantly impacts the borrower’s credit score. Lenders report payments that are 30 days or more overdue to the major credit bureaus—Experian, Equifax, and TransUnion. The longer a payment remains outstanding, such as 60 or 90 days late, the more severe the negative effect on the credit score becomes.

Borrowers can expect consistent communication from their lender once payments are missed. This communication, which may include phone calls, letters, or emails, serves as a reminder of the overdue amount and a warning about potential further actions. These efforts are aimed at encouraging the borrower to bring the account current.

If payments continue to be missed, the loan will eventually be declared in default. This declaration occurs after a certain period, commonly 30, 60, or 90 days past due, depending on the terms outlined in the loan agreement. Once a loan is in default, the lender can pursue more severe collection actions.

The Repossession Process

Repossession of a vehicle can occur once a car loan is in default. While some states require specific notice, repossession can happen without prior warning once default is established. Repossession agents carry out the seizure of the vehicle. This process is expected to be “peaceable,” meaning it should occur without any breach of public order or confrontation.

Borrowers have limited rights during repossession. Any personal belongings inside the car are not considered part of the collateral. Borrowers have a right to retrieve these personal items from the repossession company or lender after the vehicle has been secured.

Following repossession, the lender is required to send specific notices to the borrower. These notices include an intent to sell the vehicle and the borrower’s right to “redeem” it. Redemption involves paying the full outstanding loan balance, including late fees, repossession costs, and other charges, within a specified timeframe before the sale occurs.

After Repossession and Long-Term Financial Impact

After a vehicle has been repossessed, the lender will sell it to recover the outstanding loan amount. This sale occurs at a public or private auction, where vehicles often fetch a price lower than their true market value or the remaining balance on the loan. The proceeds from this sale are then applied to the borrower’s account, reducing the amount owed.

Despite the sale, borrowers remain responsible for a “deficiency balance.” This balance represents the difference between the total amount owed (including the outstanding loan principal, accrued interest, late fees, and all repossession and sale expenses) and the amount the vehicle sold for. For example, if a borrower owes $15,000 and the repossessed car sells for $10,000, there could be a $5,000 deficiency, plus additional fees.

Lenders will pursue collection of this deficiency balance. This can involve continued communication, such as phone calls and letters, or the account may be turned over to a third-party collection agency. If these efforts are unsuccessful, the lender may initiate legal action by filing a lawsuit against the borrower to obtain a judgment for the deficiency.

A judgment is a court order obligating the borrower to pay the remaining debt. Once a judgment is obtained, lenders can pursue various enforcement actions, depending on state laws. These actions might include wage garnishment, where a portion of the borrower’s wages is directly withheld, or bank account levies, which allow the seizure of funds from the borrower’s bank accounts. Property liens may also be placed on other assets owned by the borrower.

The long-term impact on a borrower’s credit report from a repossession and a deficiency balance is significant. A repossession remains on the credit report for up to seven years from the date the debt first became delinquent. This negative mark damages creditworthiness, making it more difficult to obtain new loans, credit cards, or even secure housing in the future. If a lender decides to forgive or write off a portion of the deficiency balance, the forgiven amount might be considered taxable income by the Internal Revenue Service (IRS). This means the borrower could receive a Form 1099-C (Cancellation of Debt) and may be required to report the forgiven debt as ordinary income on their federal income tax return.