How Bad Is It to Default on a 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. Time frames vary by lender, with some declaring a loan to be in default in as few as 30 days and others waiting up to 90 days before making that determination.

Before a default, you should receive some warning signs and notices. For example, when you miss your first car payment, you should get 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 or other penalties. After 30 days, your lender will likely report the delinquency to the major consumer credit bureaus—Experian, TransUnion and Equifax—and the late payment(s) will appear on your credit reports. If you don't settle your debt or continue to miss more payments, you could default on your car loan.

Tip: When you default on an auto loan, your lender will likely ramp up collection efforts, handing your account to their in-house collection team or a third-party agency to recover the debt. In addition to the loan's late payments appearing on your credit report, this separate collection account will also appear and stay on your report for seven years.

What Happens if You Default on a Car Loan?

Auto loan default consequences could impact your credit and finances for years. Some common repercussions include:

1. Your Credit Score Will Be Impacted

A delinquency stays on your credit report for seven years from the date of the first missed payment, which may make it more difficult to qualify for credit and loans. On top of that, one or more late payments could severely harm your credit score. That's because payment history is the single biggest scoring factor, accounting for 35% of your FICO^® Score^Θ, the score used by 90% of top lenders. If your car is repossessed, it'll leave a serious derogatory mark that will stay on your credit report for seven years.

2. Your Lender Could Repossess Your Car

An auto loan is a secured loan, with your car serving as collateral. If your loan defaults after nonpayment, your lender may repossess your vehicle. Depending on your state's laws and the terms of your loan agreement, a lender may be able to repossess your car as soon as you miss one loan payment, and they may not have to give you any warning. Lenders commonly sell repossessed cars at auction to recoup what you owe on the loan.

Learn more:How Does Repossession Work?

3. Your Loan Could Go to Collections

You could still owe money even after your lender takes away your car. If the lender fails to recover your entire loan balance at auction, they could hold you responsible for paying the difference, also known as a deficiency balance. You could receive calls, emails and letters from collection agencies trying to recover the deficiency balance. Even worse, your wages could be garnished and a lien could be put on your home. Even if you pay off the debt, an account in collections remains on your credit report for seven years from the date of delinquency.

How to Avoid Car Loan Default

If you've missed or think you'll miss a car payment, default is not inevitable. Take these steps to avoid defaulting on your loan.

Negotiate With Your Lender

If making your car payments is challenging, it's a good idea to contact your lender as soon as possible. By working with your lender, you may find options that can help you avoid a default—and the consequences that come with it.

Similarly, your lender may prefer to work with you rather than deal with the hassle of repossessing your car, auctioning it off and pursuing debt collection for any remaining balance.

Contact your lender to talk about auto loan hardship programs, which may include:

• Deferring one or two of your monthly payments to the end of your loan: You'll typically only need to pay interest for the deferred month(s) while you get your finances on track.
• Extending your loan term to reduce your monthly payments: This will cost you more in interest over the life of the loan, but could help you avoid default and potential repossession.
• Renegotiating your loan terms: If your lender agrees to a loan modification, you could get more affordable monthly payments, though the total paid over time will likely be higher.

Any change to your original loan agreement—including a deferment or a new payment plan—should be documented in writing to avoid confusion over skipped or modified payments in the future.

Learn more:What to Do if You Can't Afford Your Car Payment

Refinance Your Car Loan

Refinancing your car loan is another option to stave off a loan default. Doing so may allow you to secure a lower interest rate or reduced monthly payments, which can help make 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. You can also refinance into a new loan with a longer repayment period to lower your monthly payments, although you could pay more in interest over the life of the loan.

Learn more:Current Auto Loan Rates and Financing

Sell Your Car

Selling your car may help you come up with the money to pay off your loan. If you sell your car for more than your loan balance, you can apply the extra cash toward a more affordable vehicle. If your loan is newer, it may not be paid down enough to wipe out your loan, and you'll still owe the difference to your lender.

Voluntary Repossession

It's wise to exhaust all of your options to avoid a 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 you'll still be on the hook for paying the difference between the amount the lender resells your car for and your remaining loan balance. A voluntary repossession will also likely be noted on your credit report, though the impact on your credit scores may be less severe than a repossession.

Learn more:How Do Voluntary Surrender and Repossession Differ?

Frequently Asked Questions

Good Credit Could Give You More Options

If you're struggling to make your car payments on time, it's a good idea to be proactive and talk to your lender immediately. This way, you can explore all available options that could help you better manage your car loan and avoid a default.

For example, if you have good credit, you may qualify to refinance your car loan at a lower interest rate, making your payments more manageable. Similarly, a good credit score might enable you to consolidate high-interest credit card debt into a lower-interest loan to free up more money for your car payment. Check your credit score for free with Experian to see where your credit stands. If necessary, address any issues that may negatively impact your credit score.