When you fall behind on your car payments, your lender could deem your loan to be in default. More U.S. consumers are facing this situation. According to Cox Automotive, default rates in April 2024 were 27.3% higher than in April 2023. Additionally, auto loan delinquencies increased from 2.23% in Q1 2023 to 2.71% in Q1 2024.

Defaulting on your car loan can lead to severe consequences, including damage to your credit score and repossession of your car. If you’re struggling to make your car payments, it’s crucial to understand your options and what happens if you default on your car loan.

How Long Before a Car Loan Enters Default?

A car loan can enter default if your payment is 30 or more days late. However, time frames vary by lender. Some may declare a loan in default after 30 days, while others wait up to 90 days.

Before defaulting, you should receive some warning signs and notices. For instance, missing your first car payment typically results in a delinquency notice from your lender. Most lenders offer a short grace period, such as 10 or 15 days, allowing you to bring your account current without a late fee. After 30 days, your lender will likely report the delinquency to major consumer credit bureaus, affecting your credit reports.

If you continue to miss payments, you could default on your car loan. Your lender will then ramp up collection efforts, possibly involving their in-house collection team or a third-party agency to recover the debt.

What Happens if You Default on a Car Loan?

Impact on Your Credit Score

A delinquency stays on your credit report for seven years from the date of the first missed payment. This makes it harder to qualify for credit and loans in the future. Late payments severely harm your credit score, as payment history accounts for 35% of your FICO® Score. If your car is repossessed, it leaves a serious derogatory mark on your credit report for seven years.

Repossession of Your Car

An auto loan is a secured loan, with your car serving as collateral. If your loan defaults after non-payment, your lender may repossess your vehicle. Depending on your state’s laws and your loan terms, a lender may repossess your car after a missed payment without any warning. They often sell repossessed cars at auction to recoup the loan balance.

Loan Going to Collections

Even after repossession, you could still owe money to your lender. If the lender doesn’t recover the entire loan balance at auction, they could hold you responsible for paying the difference, known as a deficiency balance. You might receive calls, emails, and letters from collection agencies. In severe cases, your wages could be garnished, or a lien could be put on your home. An account in collections stays on your credit report for seven years from the date of delinquency.

How to Prevent a Default on a Car Loan

Negotiate With Your Lender

If making your car payments is challenging, contact your lender immediately. By working with your lender, you might find options to avoid default and its consequences. Lenders often prefer to work with you rather than repossess your car, auction it, and pursue debt collection.

Options may include:

• Deferring Payments: Deferring one or two payments to the end of your loan. You’ll typically only need to pay interest for the deferred month(s).
• Extending Loan Term: Extending your loan term to reduce monthly payments. This increases interest costs but helps avoid default.
• Renegotiating Loan Terms: Modifying your loan terms to get more affordable payments.

Ensure any changes to your loan agreement are documented in writing to avoid confusion over modified payments.

Refinance Your Car Loan

Refinancing your car loan can help stave off default. It may allow you to secure a lower interest rate or reduced monthly payments, making it easier to afford your payments. If your credit has improved since taking out your loan or if interest rates have dropped, you might qualify for a lower rate. Refinancing into a longer repayment period also lowers monthly payments, though it increases interest over the loan’s life.

Sell Your Car

Selling your car might help you pay off your loan. If you sell your car for more than your loan balance, you can use the extra cash to buy a more affordable vehicle. If your loan is newer, it may not be paid down enough to wipe out the balance, leaving you owing the difference.

Voluntary Repossession

As a last resort, you may return your car to the lender if they request it. This is called a voluntary repossession. You’ll likely incur fewer fees but still owe the difference between the resale price and your remaining loan balance. A voluntary repossession will be noted on your credit report, though the impact may be less severe.

Good Credit Could Give You More Options

If you’re struggling to make car payments, be proactive and talk to your lender immediately. Explore all available options to manage your car loan and avoid default. Strong credit may qualify you to refinance at a lower interest rate, making payments more manageable. A good credit score might also enable you to consolidate high-interest credit card debt into a lower-interest loan, freeing up more money for your car payment.

If you ever need expert assistance or guidance on your credit journey, don’t hesitate to reach out to the Nerds! Additionally, stay updated with the latest tips and information by following us on Facebook, Instagram and TikTok!