3 tips if you’re facing an auto loan default

Man drives in car hoping he doesn't have to default on his auto loanImage: Man drives in car hoping he doesn't have to default on his auto loan

In a Nutshell

Defaulting on an auto loan can hurt your credit and result in a car repossession. If you find yourself behind on payments, it's worth trying to work with your lender on a plan to make your loan current. Seeking credit counseling or refinancing your car may also help you get your auto financing back on track.  
Editorial Note: Intuit Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. Information about financial products not offered on Credit Karma is collected independently. Our content is accurate to the best of our knowledge when posted.

Are you struggling to make your auto loan payments? If so, you’re not alone. Default rates have reached record highs, suggesting that many Americans are having trouble repaying their auto loans.

Roughly 5% of auto loans were 90 days delinquent or more in the second quarter of 2020 — the highest 90-day loan delinquency rate in more than seven years — according to data from the Federal Reserve Bank of New York.

Falling behind on your auto loan payments can have serious consequences. If you’re unable to make payments on time, your loan may become delinquent and face default. Your lender can repossess your vehicle, and your credit will likely take a hit in the process.

If you’re facing default, we have some tips that might help you steer your finances in the right direction as you work to get your car payments current.

How long before a car loan is in default?

The timeline for default depends on your loan terms as well as state and federal laws. In many states, you’re considered in default as soon as you miss a payment on an auto loan. So be sure to consult your loan agreement’s terms of repayment.

What happens if you default on a car loan?

If you fail to make your payments on time, your lender could eventually take your vehicle — and your credit could take some hits. That’s because auto loans are typically secured loans that are backed up by collateral — the collateral typically being the car you’re buying.

Typically, your lender will spell out the terms for repossession in your loan agreement. According to the FTC, once a car loan is in default, the laws of most states allow lenders to repossess the car at any time without notice. They may keep the car as compensation for the debt or resell it — but if the car sells for less than you owe on your auto loan, you may be on the hook for the difference. And if you can’t pay the difference, you could find yourself in collections. 

The FTC says that some states may allow you to “reinstate” a loan after your car has been taken back by the lender. In those states, you can reclaim the vehicle by paying the amount you failed to pay on time, along with your creditor’s repossession expenses.

How can you help prevent default on a car loan?

Loan default doesn’t have to be inevitable. If your car payments are becoming a burden, it’s worthwhile to be proactive about finding a solution. Repossession could stay on your credit reports for up to seven years. And even if your car doesn’t get repossessed, missing payments can still seriously affect your credit and credit scores. Here are a few tips.

1. Seek professional financial help

Gerri Detweiler, credit expert and author of “Debt Collection Answers,” says you may need professional advice to get back on track if you’re worried about missing a car loan payment.

“If you are at risk of falling behind on your auto loan, you may want to reach out to a reputable credit counseling agency that can help you go over your budget and try to find a way to free up money to pay off the loan,” she says.

Universities, credit unions, housing authorities and military bases often offer reputable, nonprofit credit counseling programs, according to the FTC.

Make sure the counselors are certified and trained in consumer credit and money management. A reputable agency will send you free information about itself without requiring you to reveal the details of your debt situation. And be sure to ask about fees. If there will be a charge for credit counseling, the FTC advises that you get a specific quote in writing and don’t sign anything until you read it and are comfortable moving forward.

If one organization won’t help you because you can’t afford to pay, the FTC suggests that you find another one to work with.

Loan counselors at nonprofit agencies often work with creditors, such as credit card companies, to reduce debts or lower interest rates so people can get caught up on their bills more easily. Look for a free or “fee-only” agency or adviser. Fee-only advisers get paid solely for their service to you, not for selling you products.

2. Negotiate with your lender

Certain lenders may rather help you with your payments than go through the hassle of repossessing your car and selling it to recover the auto debt. Detweiler suggests contacting them before your loan goes into default. If you can give them a good reason for your financial problems, they may be more inclined to help.

Here are some ways your lender may help.

  • Work with you to renegotiate the loan terms
  • Defer your payments for 30 days
  • Reduce your monthly bill by stretching out the loan repayment period. There may be fees associated with this, so be sure to ask about costs and get any agreement in writing.

3. Refinance your car

If you’re struggling to make your monthly payments, refinancing your car can be another option. Even if you have bad credit, you may be able to refinance and get a lower interest rate or lower monthly payments. If your credit has improved since you got your loan or if you’ve been making payments on time for a while, your chances for refinancing may be better.

Refinancing essentially means you’re paying off your old auto loan with a new loan. If interest rates have gone down or your credit has improved, you may be able to get a lower loan rate. Or, you might decide to choose a new loan with a longer loan term to stretch out your payments. Just remember that a while a longer repayment period will reduce your monthly payment, you’ll likely end up paying more in interest on the loan.

If you aren’t able to refinance, Detweiler says one way to avoid default is to sell the car and pay off the loan. But this isn’t always an option. Cars usually depreciate over time, so you may not be able to sell your car for enough money to fully repay the lender.

If you can’t get enough money to pay off the loan, it may make sense to sell the car for the best price you can get and, if possible, borrow money from friends or family to pay off the rest of the auto loan. This can help you avoid default and protect your credit history.

What’s next?

Along with repossession, an auto loan default can damage your ability to get credit in the future — so if you find yourself behind on payments, it’s in your best interest to work with your lender on a plan to make your loan current.

If you aren’t able to work out a plan with your lender that you feel comfortable with, consider whether a refinance might make sense for you.

And when it comes time to buy a new car down the road, keep in mind that opting for a less expensive used car, making a down payment and choosing a shorter loan term can all help reduce how much you need to borrow and the amount of interest you pay.

Worried about auto loan debt because of COVID-19?

If you’re having trouble keeping up with your auto loan payments, check out our Relief Roadmap and some general advice for budgeting and paying down debt.

Tips for budgeting and managing debt