Auto loan charge-off without repossession: Is it possible?

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In a Nutshell

An auto loan charge-off could happen with or without repossession of your vehicle, depending on whether your auto loan is secured by your vehicle as collateral. And even if your loan is secured, part of what you owe could be charged off after a repossession.  
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An auto loan charge-off or repossession can happen when a borrower is delinquent on a loan and the lender gives up on trying to collect payment on a monthly basis.

An auto loan charge-off without repossession is unlikely, unless you have an unsecured auto loan. Auto loans are typically secured by the vehicle, which means it acts as collateral. If you don’t make your car loan payments as agreed, your lender can take back your vehicle and keep it as payment for the missed loan payments or sell it to recover the money you owe.

A charge-off or a repossession can negatively affect your credit scores for years, so it’s important to understand what happens if your loan is charged off, how it’s different from a repossession and what you can do if a lender charges off your loan.

What happens if an auto loan is charged off?

An auto loan charge-off without a repossession typically occurs when you haven’t made your minimum monthly payments on an unsecured car loan for several months in a row. If your loan is secured, the lender has greater incentive to repossess your vehicle than charge off your account.

The Federal Deposit Insurance Corp. has established guidelines for lenders when it comes to credit losses. For example, lenders must charge off auto loans when they are 120 days delinquent, but they may charge off past-due accounts sooner. A debt may also get charged off within 60 days of a lender receiving notice that someone has filed for bankruptcy.

Keep in mind that a charged-off loan doesn’t mean you’re not responsible for the debt anymore. Unless the debt gets discharged in bankruptcy or your lender forgives or cancels your debt, you’re legally obligated to repay it, even if the account is charged off.

Even if the lender decides to no longer attempt to get payment on the account, it might sell the debt to a third party like a collection agency, which will continue to try to collect the unpaid balance. And that’s not all. Charged-off accounts that get reported to the credit bureaus can remain on your credit reports as a derogatory mark for up to seven years.

How is a charge-off different from a repossession?

Repossession is when your lender takes back your car if you’ve defaulted on a secured auto loan or lease. The lender might keep the vehicle as “payment” or sell it to recover some of the money you owe.

Some state laws let you reinstate your loan after a repossession if you can bring the loan current by paying the amount you are behind on your loan plus any costs the lender incurred during the repossession. If you don’t live in an area where reinstating your loan is possible, but you can come up with enough money to pay your outstanding loan balance plus repossession fees, you might be able to buy back your car before it’s sold to someone else.

If you don’t have enough money to get your car back and the lender sells it for less than what you owe, you may have to pay the deficiency balance. This is the difference between what you owe — including repossession and sale costs — and what your lender earned when it resold your car. If you’re unable to pay the deficiency balance, the lender may then charge off the account.

Like charge-offs, repossessions can stay on your credit reports for up to seven years.

Is a charge-off better than a repossession?

While you might get to keep your vehicle if your auto loan is charged off, both charge-offs and repossessions negatively affect your credit history and could impact your ability to qualify for a loan in the future. Plus, you could still be on the hook for a hefty amount of cash in either situation, since you’re still legally responsible for paying the outstanding balance after a charge-off or repossession.

What can I do if my auto loan is charged off?

If your auto loan is charged off, you may be able to negotiate a payment plan with the lender — or collection agency or debt buyer, if the debt has been transferred — to repay what you owe. While repaying the loan won’t remove the charge-off from your credit reports, it may help lessen the negative impact on your credit scores or your ability to get a loan in the future.

If your lender hasn’t sold your account to a debt collector, you can ask it to remove the charge-off from your credit reports after you pay off the debt. But the lender isn’t obligated to do this.


Can I trade in or sell a car that has been charged off?

If your lender charges off a secured auto loan but doesn’t repossess your vehicle, you likely won’t be able to sell it or trade it in. When you get a secured auto loan to finance the purchase of your car, the lender places a lien on the car, which gives it a legal right to the car if you don’t make your payments. The lender typically won’t release the lien or car title (if it holds it) until the loan is paid in full.

In contrast, if your lender charges off an unsecured auto loan and doesn’t repossess your vehicle, you likely will be able to sell it or trade it in, since your lender has no security interest in your vehicle. But keep in mind that this scenario is extremely rare — and even if your loan is charged off, your obligation to pay the debt will continue.

Next steps

If you’re struggling to make your auto loan payments and facing a potential charge-off or repossession, contact your lender and ask if it can make alternate payment arrangements to help you get back on track. It may be willing to work with you by developing a new repayment plan, waiving late payment fees or deferring payments.

For more details about what you can do if you’re struggling to make your payments, check out our article on how to help get your auto loan back on track.

About the author: Jennifer Brozic is a freelance financial services writer with a bachelor’s degree in journalism from the University of Maryland and a master’s degree in communication management from Towson University. She’s committed… Read more.