What Happens When You Default On a Car Loan?

You can lose your credit score and even your favourite car if you default on a car loan. When someone defaults on a car loan, many other terms are involved. After a serious pandemic, the world is facing an economic crisis. People who had a loan on their head, are facing the fear of defaulting on their loans. Well, if you are a car owner and have any current car loan on your head, then this blog is for you. Here we are going to find out what happens when you default on a car loan.

All about a car loan default

You surely do add the car loan instalment in every monthly budget and you surely don’t want to become a defaulter in any case. But you should stay aware of the situations which can give way to such a situation. To understand the concept better let’s understand different aspects of defaulting on a car loan:

When does a default on a car loan happen?

The term “car loan default” refers to when a customer fails to repay his/her car loan to the bank, which lent the money for its purchase, repeatedly. But is there a prescribed number of failed payments? Indeed. Car loan agreements usually set out these terms in detail. The terms should be included in your loan agreement. In this section, you will learn how everything about your car loan works, what obligations you have to repay, and when you are in default. In the agreement, there may be information about the possible risks and solutions in the event of default.

Outcomes of defaulting on a car loan

Once you miss your car payment due date, your car loan account will be considered delinquent. There will be a late fee and you will get an extension of 10 to 15 days. Your landlord will send a report to consumer credit bureaus if you fail to pay after the notice period, which will be added to your credit report later. You may be notified in advance if you have defaulted on your car loan based on the institution you borrowed from. Defaulting on a car loan can have serious consequences, including:

  • Late car payments directly affect your credit score: A single late car payment can have a serious negative impact on your credit score. Delinquency on your loan payments will stay on your credit report for seven years.
  • The lender can repossess your car if you miss one loan payment: Depending on your state’s laws and the terms of the loan agreement, the lender may be able to repossess your car without notice as soon as you miss one loan payment. Most of the time, however, the lender will seek repayment before taking drastic steps such as repossessing the vehicle. To recover the money owed on your loan, your lender typically sells the car at auction after repossessing it. You might be sued if the lender doesn’t get enough money from the sale to pay off your loan.

What to do after defaulting on a car loan?

One should not stay tensed after defaulting on a car loan, but should make the right efforts to get the default recover by trying the below-mentioned steps:

You can extend your car loan’s duration by contacting your bank or lender. This will reduce the monthly commitment and hence some stress from your shoulders.

  • Talk to your bank or lender about making a deferred payment. Under deferred payment, you will be able to skip the current month’s payment and can make it at a later date. To do this, you have to give valid reasons to your lender.
  • You can also make a request to your bank or lender to completely change the payment due date.
  • Late charges can add a burden on your budget when you miss making the instalment paid. In this condition, you can make a request to the lender or bank to waive these fees or extra charges off so that you can make a timely payment.

Preventing measures of 

It is important to stay disciplined for what you had promised to. Default on a car loan can let you face the situation of a bad credit score and you might also lose your car. The below-mentioned steps will help you to stay prevented:

  1. By getting in touch first, you show your lender that you are making a good-faith effort to find a solution, which may lead to a greater willingness to negotiate. Contact your provider before the due date for your next loan payment.
  2. If you want to refinance your car, you don’t have to go through the dealership. Instead, you talk directly with the lender. Your existing loan will be paid off and the original lender will take title to the car when you refinance your auto loan. Ideally, you should refinance to a loan with a lower interest rate, lower monthly payments, or both, which can make the debt more manageable.
  3. Knowing your deferment options- Deferment is meant to be a short-term solution for people with temporary financial difficulties. A lender who approves the deferment will send you a forbearance agreement that specifies when you’ll resume payments again and if there are any fees or penalties. Your loan repayment period is extended if you defer payments, and interest will accrue.
  4. Take the loan over from someone else- While most auto loans do not permit it, some lenders will let you do so. Finding someone with similar credit terms to yours with a good credit score will be essential. Contact the lender about this option if you already know the candidate.
  5. Surrendering a car voluntarily can help – this will still reflect in your credit report as evidence that you failed to repay the loan. You won’t experience the same negative effects as a repossession, though, since it shows that you are cooperative.
  6. You need to keep your auto loan from defaulting by talking to your lender as soon as possible. You can determine if you qualify for refinances or debt consolidation loans, both of which require good credit, by checking your credit score and report.

Conclusion

So, here was all about what happens when you default on a car loan. Here are points which you should keep in your mind. The repossessed car should be examined before being purchased. An automobile expert can help you with this. When available, you should also examine the vehicle history report. In order to make sure you buy a reliable car, you should carefully inspect the interiors and if possible, take a test drive.

 FAQs

  1.       What happens in case of a car loan default?

Ans. Default occurs when an applicant fails to pay 3 consecutive EMIs. Lenders may then take action. You will then receive a notice of default from the lender, telling you how long you have to repay the outstanding amount or your collateral (house or car) will be seized.

  1.       Can I back out of a car loan after signing?

Ans. Your car finance can be cancelled without penalty, which is good news. You can terminate your contract in a cooling-off period after you have signed it, or through a process called voluntary termination.

  1.       Can I close the car loan before tenure?

Ans. A prepayment fee is charged by banks for prepaying car loans before their tenure ends. It is possible to reduce your interest rate by pre-closing your car loan. Even if the borrower wants to pre-close the loan, the bank might not approve it. It is for this reason that banks charge pre-closure penalties.

  1.       Does pre-closure of loan affect cibil or credit score?

Ans. Your score may not be directly affected by pre-closure. Nevertheless, you will not be able to build a good credit history that will improve your score. Prepaying a loan or foreclosing on your home can lower your credit score, contrary to popular belief. 

Also Read:

How to Get a Car Loan Without a Cosigner?

How To Get My Name Off a Joint Car Loan?

 

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