3 tips if you’re facing an auto loan default

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

In a Nutshell

Defaulting on an auto loan can hurt your credit — so if you find yourself behind on payments, it’s worth trying to work with your lender on a plan to make your loan current.

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Are you struggling to make your auto loan repayments? You’re not alone: A record high of more than 7 million Americans were 90 days or more behind on their car payments in the fourth quarter of 2018, according to data from the Federal Reserve Bank of New York.

Falling behind on your auto loan payments can have serious consequences: Your lender can repossess your vehicle, and your credit will likely get dinged in the process.

Loans can go into default when you fail to make payments on time. The exact timeline depends on your loan terms. However, your lender may offer you a grace period to bring your payments current. Be sure to consult your loan agreement’s terms of repayment.

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.

What is auto loan default?

When you borrow money to buy a car, you’re promising the lender that you will pay it back — generally with interest and fees. If you’re unable to pay, your loan may become delinquent and face default.

The timeline for default depends on your loan terms as well as state and federal laws. The New York Fed’s report for Q4 2018 on household debt and credit reporting found that people with lower credit scores were disproportionately likely to be at risk for default.

Life circumstances often cause people to fall behind on their auto loans, says Carroll Lachnit, a consumer advice editor at Edmunds.com, an online resource for automotive information.

“People lose their jobs,” she says. “People get divorced. People buy cars that are more than they can afford. Maybe you bought a car with your spouse, and your spouse has passed away.”

Tips if you’re facing auto loan default

Loan default doesn’t have to be inevitable. Repossession could stay on your credit reports for up to seven years, so if your car payments are starting to burden you it’s definitely worthwhile to be proactive about finding a solution. Even if your car doesn’t get repossessed, missing payments can still seriously impact your credit.

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 credit counseling programs, according to the Federal Trade Commission.

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.

Lachnit says your lender may help you in the following ways:

  • Working with you to renegotiate the loan terms
  • Deferring your payments for 30 days
  • Reducing 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 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. You’ll likely want a loan that gives you more financial flexibility.

How to refinance your car loan when you have bad credit

If that doesn’t work, Detweiler says one way to avoid default is to sell the car and pay off the loan. This isn’t always an option, however. 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 happens if I default on my auto loan?

Unlike unsecured loans, which are generally supported by your personal creditworthiness, auto loans are typically secured loans that are backed up by collateral — the collateral typically being the car you’re buying. In that case, if you fail to make your payments on time, your lender could eventually take your vehicle.

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 value of the vehicle at the time is not sufficient, you may also find yourself in collections.

If a lender sells your car but doesn’t get enough money to cover what you borrowed, “you’re on the hook for that (amount), too,” Lachnit says. If you fail to pay the difference between what you owed and what the lender recovered by selling the repossessed vehicle, that information may go onto your credit reports and likely will make it more difficult for you to successfully apply for future loans.

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.

Bottom line

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.