What If I Stop Paying My Car Loan?
Explore the full financial and legal impact of failing to make car loan payments, affecting your credit and future stability.
Stopping car loan payments carries significant financial and legal repercussions. A car loan is a secured debt, meaning the vehicle itself serves as collateral for the loan. This arrangement grants the lender specific rights to the car if the borrower fails to uphold the loan agreement. Understanding these consequences can help individuals navigate potential financial difficulties.
Missed Payments and Initial Steps
Missing a car loan payment triggers immediate lender actions. Most auto loans include a grace period, often 10 to 15 days, allowing payment without late fees. Once this period expires, lenders assess a late fee, which can be a flat rate or a percentage of the overdue payment.
Beyond financial penalties, a missed payment quickly impacts a borrower’s credit. Lenders report payments 30 days or more past due to major credit bureaus. This negative mark can significantly lower a credit score, affecting the ability to secure future loans or credit for several years. Lenders also initiate contact through calls and letters to arrange for collection.
Vehicle Repossession
Should missed payments continue, the lender can repossess the vehicle. Repossession commonly occurs after multiple missed payments or once the loan is 60 to 90 days delinquent. The loan agreement defines when the account is in default, allowing the lender to exercise this right.
In most states, lenders can repossess a secured vehicle without a court order or prior notice. Repossession agents take possession of the vehicle. They can retrieve the car from public or private property without explicit permission. However, agents cannot “breach the peace” during the process. This means they cannot use physical force or threats, enter a locked garage, or continue the repossession if the borrower is physically present and objects.
Post-Repossession Obligations
After a vehicle is repossessed, the borrower’s financial obligations continue. The lender sells the repossessed vehicle through an auction to recover the outstanding loan balance. This sale must be conducted in a “commercially reasonable manner,” meaning the process must maximize the vehicle’s value.
A “deficiency balance” can occur when sale proceeds from the repossessed vehicle are less than the total amount owed, including repossession, storage, and auction fees. For example, if a borrower owes $15,000 and the car sells for $10,000, a $5,000 deficiency balance remains, plus additional fees. The borrower remains responsible for paying this balance, which the lender will seek to collect.
Alternative Lender Actions
If a deficiency balance remains after repossession and sale, or if repossession is not pursued, lenders can take further legal action to collect the outstanding debt. The lender may send demand letters and engage collection agencies. If these efforts fail, the lender can file a lawsuit to obtain a judgment for the outstanding loan amount or deficiency balance.
A court judgment grants the lender powerful collection tools. These include wage garnishment, where a portion of earnings is withheld to repay the debt, or bank account levies, allowing the lender to seize funds from bank accounts. Property liens, which place a claim on other assets, may also be pursued. The availability and specifics of these actions vary by state law.