What Happens to Your Credit If You Miss a Car Payment?
Illness, losing your job, or having another expensive emergency come up can all result in lacking the funds needed to make your car payment. Before you panic and assume that your car will be repossessed, know that you have some options available that can help you keep your car without damaging your credit, depending on your payment history and credit score.
The worst thing you can do is ignore your problem.
No matter what, you must call to discuss that matter with your lender. The sooner you call the more options you’ll have. Repossession is the last thing you and your lender want – it’s a lose-lose for you both. So just know up front that your lender wants to help you, so let them.
So when you crunch your numbers and realize you won’t be able to make your monthly car payment, call your lender first thing. They may allow you a grace period, called forbearance, that allows you to skip your payment for a few months. This means they’ll usually just extend your loan period and tack on the missed periods at the end.
You may also be able to refinance your loan to lower your monthly payment, but you’ll need to have a pretty good credit score to refinance.
If you missed your payment completely, you can expect a call from the lender inquiring as to what happened. Then they’ll probably begin discussing your options, as mentioned above, but are more likely to charge you a late fee.
The good news at this point – they probably won’t report just a single missed payment to the credit bureaus, so you may have time to get your situation under control before you credit is affected.
But if you’re 30 days or later on your payment and haven’t tried to resolve the issue, they’ll probably report your payment as delinquent, and you’ll be receiving more and more calls.
Once the 90-day mark rolls around, you may be declared in default and your loan will be sold to a debt collector. This is when repossession occurs. And even then, your car will be sold at auction and you’ll still owe the balance between what it sold for and the balance of your loan. If you surrender your car before this happens, you’ll avoid the repo and attorney fees, but still owe the difference. By this point, your credit score will have taken a significant hit.
If you find yourself in a situation that will prevent you from making any more payments on your car, again it’s best to call your lender as soon as possible. Your best option in this situation are to sell your car, pay off the balance, and use what’s leftover to pay cash for a less-expensive car. You can also trade in your car for a less-expensive one or one you can afford outright.
Before you purchase a car in the first place, consider your buying options , and how to keep your credit in good shape.
Late Car Payments? Avoid Repossession in 3 Quick Steps
If you’ve missed a payment on your car loan, don’t panic — but do act fast.
Your payment can be marked delinquent on your credit report starting 30 days after it was due. That hurts your credit score, and the mark on your credit report could keep you from getting future car loans or refinancing this car. Worse, two or three consecutive missed payments can lead to repossession, and some lenders have adopted technology to remotely disable cars after even one missed payment.
Whether you just forgot to send the payment or can’t afford the full amount, having an informed, honest conversation with your lender is key to limiting the damage. Take three steps to get back on track:
If you simply overlooked the payment but can cover it, great. Skip ahead to Step 2. But if you’re having a hard time pulling together your payment, start with a little research.
Know your loan details: Make sure you understand your loan balance, interest rate and term (how long the loan runs). Check to see if there’s a fee for a late or missed payment.
Know what you can pay: Review your budget to see if you can trim any expenses so you can put more toward your loan payment. (If you don’t have a budget, start at least a simple one now.) Try to pull together some extra cash.
Once you’ve identified how much you can pay this month, take an honest look at your overall situation. Think about whether this is one tight month or if your car payment is an ongoing problem. In general, try to keep car expenses — including loan payments, insurance, gas and maintenance — at no more than about 20% of your take-home pay.
How you proceed depends on whether your missed payment is a one-time issue or a sign that your loan is unaffordable.
For a payment you simply forgot to make, call the lender to make the payment as soon as you can. You may have to pay a late fee for missing the due date. In the future, you may want to consider setting up automatic payments to avoid missing the payment again.
One-time late payment: Loan deferment is a common solution for an isolated missed payment. The missed payment is pushed to the end of the loan term, and you’ll generally only have to pay the interest owed this month. Some lenders may waive late payment fees as well. In general, lenders are more forgiving when you’ve taken the initiative to communicate and made an effort to resolve your missed payment.
Ongoing problem: If your car loan is unaffordable, you’ll need to deal with this month’s issue first by seeking a deferment. That stops the immediate threat of a credit report ding, credit score damage or repossession. Then, immediately look into longer-term solutions, such as refinancing or trading in your car for a more affordable one. If you’ve missed multiple loan payments, your lender may suggest these options when you call.
Once you know what you can pay and your likely options, it’s time to pick up the phone. Explain your situation and ask your lender about potential solutions, such as deferment. Remember, you’re asking for help, so be courteous rather than defensive or angry.
Vince Shorb, CEO of the National Financial Educators Council, has one piece of advice: Know your story. Explaining the context of your missed payment — and what you’ll do to resolve it — can make lenders more inclined to cut you a break.
“If you have a good story and see that light at the end of the tunnel, the lender may be more willing to work with you than someone who’s on a downward spiral,” Shorb says. “If they feel confident you’ll be able to repay the loan, they’ll feel more comfortable working with you.”
You’ll likely have to prove your story. For example, if you can’t pay this month because you recently lost your job, but you have a new one starting soon, your lender may ask for employment verification.
Before signing on to any loan adjustment such as a deferment, be sure you fully understand the terms, and try to get them in writing for future reference.
The good news is that your lender wants you to succeed in paying your loan rather than spend its money and time repossessing your car. Following these steps to assess, understand and communicate can head off damage to your credit.