What Happens If You Miss a Car Payment?
Understand the evolving consequences of a missed car payment, from initial financial and credit impacts to potential repossession.
A car loan is a contract requiring consistent payments. Missing a payment can lead to financial repercussions, escalating from minor penalties to long-term challenges. Understanding these potential events is important, as implications extend beyond immediate penalties, affecting future borrowing and overall financial health.
Initial Consequences of a Missed Payment
Missing a car payment triggers immediate lender actions and financial penalties. Most loan agreements include a grace period, typically 10 to 15 days after the due date, during which payment can be made without being officially late or incurring fees. Once this period expires, lenders apply late fees as defined in the loan contract. These fees can be a fixed amount ($25-$50) or a percentage (1.5%-15%) of the overdue payment, increasing the outstanding balance. Lenders also contact borrowers shortly after a missed payment to inquire about the overdue amount.
Impact on Your Credit
A missed car payment significantly impacts a borrower’s credit report and score. Lenders report payment activity to major credit bureaus (Equifax, Experian, TransUnion) once a payment is 30 days past due. Payments within a grace period or a few days late typically avoid a negative mark. However, a payment reported as 30, 60, or 90 days late becomes a derogatory mark on the credit history.
Payment history is the most influential factor in credit scoring, accounting for about 35% of a FICO Score. A single late payment can noticeably drop a credit score, and multiple late payments severely diminish it. This negative mark can remain on a credit report for up to seven years, affecting future loan rates, new credit, housing, or insurance applications.
Communication and Resolution Attempts
Proactive communication with a lender is constructive when facing payment difficulties. Contacting them early, even before a payment is due, shows responsibility and a willingness to resolve the situation. Lenders are often more receptive to discussing options if approached promptly.
Lenders offer various tools for temporary financial hardship, though these are not guaranteed. Options include payment deferral, postponing payments to the end of the loan term. Loan modification is another possibility, adjusting the interest rate, extending the loan term, or temporarily reducing payments. Documenting all discussions and agreements, including dates, names, and terms, is important for borrower records.
The Repossession Process
If communication fails and payments remain significantly past due, the lender may initiate repossession. Procedures vary by state law regarding notice requirements. Some states require a notice of default and intent to repossess, offering a final chance to cure the default. Other states may not require prior notice, allowing repossession without warning.
A repossession agent, hired by the lender, takes physical possession of the vehicle. Agents can seize a vehicle from most public or private properties but are legally prohibited from “breach of the peace,” such as using threats, violence, or damaging property. The lender’s objective is to recover the vehicle, their collateral, to mitigate financial loss.
Post-Repossession Outcomes
After repossession, the lender typically sells the vehicle, often through public auction or private sale. Proceeds are applied to the outstanding loan balance, after deducting costs like towing, storage, and auction fees. The sale price is often less than the remaining loan balance, especially after these additional costs.
This difference results in a “deficiency balance.” For example, if a borrower owes $12,000 and the vehicle sells for $3,500 after $150 in costs, the deficiency balance is $8,650. The borrower remains legally responsible for this amount, and the lender may pursue collection, including legal action. Repossession and any deficiency judgment are reported to credit bureaus, further damaging credit for an extended period.
Initial Consequences of a Missed Payment
Missing a scheduled car payment typically triggers immediate actions from the lender and can incur initial financial penalties. Most loan agreements include a grace period, often between 10 to 15 days, during which a payment can be made without being officially late. If payment is received within this grace period, no late fees are generally assessed.
Once the grace period expires, the lender applies late fees, defined in the loan contract. These fees can be a fixed amount ($25-$50) or a percentage (1.5%-15%) of the overdue payment, increasing the outstanding balance. Lenders also contact borrowers shortly after a missed payment to inquire about the overdue amount.
Impact on Your Credit
A missed car payment significantly affects a borrower’s credit report and score. Lenders report payment activity to major credit bureaus (Equifax, Experian, TransUnion) once a payment is 30 days past due. This creates a derogatory mark, which can remain for seven years. Such marks lower credit scores, affecting future loans, credit, housing, and insurance.
Payment history is the most influential factor in credit scoring models, accounting for about 35% of a FICO Score. A single late payment can cause a noticeable drop, and multiple late payments severely diminish it. This negative mark can remain for up to seven years, impacting future interest rates, new credit, housing, or insurance applications.
Communication and Resolution Attempts
Proactive communication with a lender is a constructive step when facing payment difficulties. Initiating contact early, even before a payment is due, demonstrates responsibility. Lenders may be more receptive to discussing options if approached early.
Lenders offer various tools for temporary financial hardship, though these are not guaranteed. Options include payment deferral, where payments are postponed and added to the loan term. Loan modification is another possibility, adjusting the interest rate, extending the loan term, or temporarily reducing payment amounts. Documenting all discussions and agreements is important for borrower records.
The Repossession Process
If communication fails and payments remain significantly past due, the lender may initiate repossession. Procedures for vehicle repossession are governed by state laws, which vary regarding notice requirements. Some jurisdictions may require a notice of default and intent to repossess, providing a final opportunity to cure the default.
In other jurisdictions, lenders may not be legally obligated to provide prior notice. Repossession is carried out by a repossession agent who takes physical possession. Agents can seize a vehicle from most public or private properties but are legally prohibited from “breach of the peace,” such as using threats or damaging property. The lender’s objective is to recover the collateral to mitigate financial loss.
Post-Repossession Outcomes
Following repossession, the lender sells the vehicle, often through public auction or private sale. Proceeds are applied to the outstanding loan balance, after deducting costs like towing, storage, and auction fees. The sale price is commonly less than the remaining loan balance, especially after these additional costs.
This difference creates a “deficiency balance.” For example, if a borrower owes $12,000 and the vehicle sells for $3,500 after $150 in costs, the deficiency balance is $8,650. The borrower remains legally responsible for repaying this balance, and the lender may pursue collection efforts, including legal action. Repossession and any subsequent deficiency judgment are reported to credit bureaus, further damaging the borrower’s credit score and history for an extended period.