It happens to most people. Sometimes, things happen in life, and you default on your auto loan. For instance, you can lose your job, and you start struggling to meet basic needs. The check you get after losing your job can cover house rent, food, electricity bills but may not cover your auto loan. You might be wondering what will happen when you default on your car loan.
Repossession of Your Car
When given an auto loan, the car acts as security, and the lender can repossess the car when you default the loan. Depending on the loan agreement, the lender might take the car when you miss one payment without giving you a warning. In some cases, the lender has to contact you and inquire about the missing payment before repossessing the car. When the lender takes the car, they sell it at auction to get the money you owe them. Some lenders will not sell the car. Instead, they will keep it, and you can reclaim your car after paying the amount you owe them.
Remaining Debts Send to Collections
When lenders repossess the car, it gets auctioned, and they might get less money from it. If the car has depreciated and sold, it does not raise the money you owe them. The lender turns back to you for the remaining amount. If you fail to pay the balance, you get listed in collections. That means, even after losing your car, you will still receive calls and emails from debt collectors. The lender still has the right to sue you because of the balance, and they can garnish your wages or a lien put on your property. Remember, even after paying the debt, your name on collections remains on your credit report for seven years.
Negatively Affects Your Credit Score
Defaulting an auto loan can cause long-term effects on your credit score. It will make it hard for you to get other loans like mortgages or credit loans. Payment history is the most significant factor when lenders calculate your credit score. It takes about 35% of your score, and when you have a bad payment history, you will have a negative credit score. When you fail to pay your auto loan once, it might cause adverse effects which will affect you for years. Once your auto loan has reached collectors, the reports will reflect for seven years. That means for seven years- you will have a low credit score. Most lenders use your credit score as a determinant when checking if you qualify for a loan.
When you fail to pay your auto loan once, most lenders will give you a grace period of about 10-15 days. If you pay within those days, you will only inquire about the charges of late payment. After 30 days of late payment, the lender reports you and adds it to your credit report. Some lenders might take 90 days to declare you a loan defaulter while other lenders might declare you a defaulter after missing the payment once.