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When you fall behind on your car payments, your lender could deem your loan to be in default. It's a situation more U.S. consumers are facing, with Cox Automotive reporting default rates in April 2024 were 27.3% higher than in April 2023. Auto loan delinquencies increased from 2.23% of auto loans in Q1 2023 to 2.71% in Q1 2024, according to Experian.
If you default on your car loan, the consequences could be severe, including harm to your credit score and repossession of your car. If you're struggling to make your car payments, it's crucial to understand your options and what happens if you default on your 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—which include the late payment in your credit reports.
If you don't settle your debt or continue to miss more payments, you could default on your car loan. In that case, 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.
What Happens if You Default on a Car Loan?
If your lender declares your auto loan to be in default, it could lead to severe repercussions that could impact your credit and finances for years, such as the following:
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 in the future. 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☉ , 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 non-payment, 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 to your lender even after they take away your car. If the lender fails to wipe out 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. 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 Prevent a Default on a Car Loan
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 your options, 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.
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.
Learn more >> How Do Voluntary Surrender and Repossession Differ?
Frequently Asked Questions
There's no specific number of payments you can miss before your car may be repossessed, as timelines vary by lender. Some lenders may repossess your car after one missed payment, although such instances are rare.
Typically, a borrower must miss two or three car payments before their vehicle is repossessed. Refer to your loan or lease agreement to determine when your loan could be in default and face repossession. Depending on where you live, you may receive notice ahead of time, as some states require lenders to notify borrowers before repossessing their vehicle.
Perhaps the most direct way to get out of a car loan and avoid repossession is to sell your car, especially if you can fetch a price higher than your current loan balance. Otherwise, consider other options, like refinancing to replace your current auto loan with a new one, ideally with better terms. Returning your car to the lender, called a voluntary repossession, should be a last resort due to the impact on your credit.
A repossession, even when voluntary, remains on your credit report for seven years and may hurt your chances of qualifying for new credit. The seven-year period begins from the date of the initial missed payment that preceded the repossession.
Learn more >> How Does a Repossession Affect Your Credit?
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 strong 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.