What Happens If You Stop Paying Your Car Payment?

When you finance a vehicle, you enter a contractual agreement with a lender, obligating you to make regular payments. This is a secured debt, meaning the car serves as collateral for the loan. Failing to make scheduled payments can lead to your loan account being declared in default. A loan default breaches the contract, granting the lender rights to recover the outstanding balance. The vehicle acts as security, giving the lender the legal right to take possession if payments cease.

Initial Consequences of Missed Payments

Missing a car payment can initiate a series of immediate financial repercussions. One of the first consequences is the imposition of late fees, which are outlined in your loan agreement. These fees can be a flat amount or a percentage of the overdue payment, generally ranging from $25 to $50 or 3% to 5% of the payment amount. Such charges increase the total amount you owe, making it harder to catch up on your payments.

Beyond financial penalties, a missed payment also impacts your credit standing. Lenders commonly report payments that are 30 days or more past due to the three major consumer credit bureaus: Equifax, Experian, and TransUnion. This negative mark can significantly lower your credit score, as payment history is a major factor in credit scoring models. A single missed payment can remain on your credit report for up to seven years, affecting your ability to secure future credit.

Lenders will begin communication efforts to address the delinquency. You can expect to receive calls, emails, and letters from the lender’s collections department. These communications serve to remind you of the overdue payment, inform you of the default status, and discuss potential payment arrangements or solutions. Responding to these communications is often advisable, as it can sometimes lead to options that prevent more severe actions.

The Repossession Process

If missed payments continue, the lender may exercise their right to repossess the vehicle. The legal right to repossess typically arises once a loan is in default, which, depending on the loan agreement, can occur after a single missed payment, though many lenders wait until payments are 60 to 90 days overdue. In most jurisdictions, lenders are not required to obtain a court order before repossessing a vehicle, as the loan agreement grants them this right.

Repossession is commonly carried out by third-party repossession agents. These agents can take the vehicle from almost any location, including your driveway, a public street, or your workplace. While they can take the vehicle without prior notice, they are generally prohibited from committing a “breach of peace” during the process.

A breach of peace means that the repossession agent cannot use physical force, threats, or enter a locked garage without permission. For example, breaking into a secured garage or threatening a person to gain access to the vehicle would constitute a breach of peace and could make the repossession unlawful. Taking a car from an unlocked garage or a public parking lot is generally permissible.

After Your Vehicle is Repossessed

Following the repossession of your vehicle, the lender is required to send you a notice of sale. This notice informs you that the vehicle has been repossessed and details the lender’s intent to sell it, usually through a public auction or a private sale. The notice also includes information about your right to “redeem” the vehicle. This means paying the full outstanding loan balance, plus any accumulated late fees, repossession costs, and other related expenses, before the sale.

The sale of the repossessed vehicle is intended to recover the outstanding loan amount. However, the sale price often does not cover the entire debt. Proceeds from the sale are first applied to repossession costs, such as towing and storage fees, and then to sale expenses, including auction fees or advertising costs. Only after these expenses are covered are the remaining proceeds applied to your outstanding loan balance.

It is common for the sale proceeds to be less than the total amount owed, resulting in a “deficiency balance.” This deficiency is the difference between your outstanding loan balance (plus all related fees and costs) and the amount the vehicle sold for. For example, if you owed $15,000, and the vehicle sold for $10,000 after $2,000 in repossession and sale costs, you would still owe a deficiency balance of $7,000. This remaining balance is a personal debt you are legally obligated to pay to the lender.

Broader Financial and Legal Impacts

The consequences of defaulting on a car loan extend beyond the immediate repossession and potential deficiency balance, impacting your financial future. A repossession will be recorded on your credit report, remaining there for approximately seven years. This entry severely damages your credit score, making it more challenging to obtain new loans, credit cards, or even rental housing in the future. Lenders view a repossession as a high-risk indicator, signaling a past inability to manage debt obligations.

If a deficiency balance remains after the sale of the repossessed vehicle, the lender may pursue legal action to recover the amount owed. This often involves filing a lawsuit to obtain a deficiency judgment against you. If the court grants this judgment, it legally confirms your obligation to pay the remaining debt.

With a deficiency judgment, the lender gains additional avenues for collection. Depending on state laws, they may pursue actions such as wage garnishment, where a portion of your earnings is directly withheld to satisfy the debt. Another potential consequence is a bank account levy, which allows the lender to seize funds directly from your bank accounts. These legal collection methods can disrupt your financial stability and complicate your ability to manage daily expenses.