Missing a payment on your car loan can have serious consequences, both financially and for your credit score. While one missed payment might not result in immediate repossession or default, it can still trigger a chain of events that could negatively impact your financial future. Understanding what happens when you miss a payment and taking proactive steps to manage your loan can help prevent further issues.
🏦 What Happens When You Miss a Car Loan Payment?
When you miss a payment on your car loan, it doesn’t automatically mean you will lose your car, but it does set off a series of actions that lenders take to recover the missed payment and protect their investment. Here’s what typically happens:
| 🔑 Consequence | What Happens After a Missed Payment | How It Affects You |
|---|---|---|
| 💳 Damage to Credit Score | Your lender will report the missed payment to the credit bureaus. | Missing a payment can lower your credit score, making it harder to secure future loans or credit. |
| 💸 Late Fees | Your lender may charge a late fee for missed payments. | The cost of the late fee adds to your debt, increasing the total amount you owe. |
| 🚗 Repossession Risk | After multiple missed payments (usually 30-90 days), repossession may be possible. | Repossession means the lender will take back the car, leaving you without transportation. |
| 📞 Contact from Lender | Lenders will attempt to contact you to resolve the missed payment. | Your lender will likely try to work out a repayment plan before taking further action. |
💡 How a Missed Payment Affects Your Credit Score
💳 Missed payments are reported to the credit bureaus (Experian, TransUnion, and Equifax) once they’re 30 days past due. This is when the missed payment starts to negatively affect your credit score. A single missed payment can cause a drop of 50-100 points depending on your current score. The more payments you miss, the more damage it will do to your credit.
Over time, a pattern of missed payments can severely damage your creditworthiness, making it harder to qualify for loans, credit cards, and even rental agreements. High interest rates may be offered to you in the future due to the increased risk lenders perceive based on your past missed payments.
💡 Tip: If you miss a payment, try to bring the payment current as soon as possible to minimize the damage to your credit score.
💡 What Happens if You Miss More Than One Payment?
If you miss more than one payment, the situation becomes more serious. After 30 days, your lender will likely report your missed payment to the credit bureaus. However, things will escalate further if you miss multiple payments in a row:
1. Late Fees and Interest Charges
💸 Your lender may charge a late fee for missing a payment. This fee is added to your loan balance and will increase the amount you owe. If you continue to miss payments, additional late fees and interest charges may be applied, making it more difficult to catch up on the loan.
💡 Tip: Contact your lender immediately if you know you’ll miss a payment to potentially avoid or reduce late fees. Many lenders offer grace periods for payments.
2. Risk of Repossession
🚗 Repossession is the most extreme action a lender can take. This typically occurs after 90 days of missed payments or more. The lender will come to take your car and sell it to recover the remaining loan balance. Even if your car is repossessed, you could still be liable for any remaining loan balance after the sale.
Repossession can leave you without transportation and cause lasting damage to your credit. If you face repossession, it’s important to act quickly and work with your lender to resolve the situation.
💡 Tip: If repossession is imminent, you may be able to voluntarily surrender the car, which can be less damaging to your credit and may allow for negotiations on the remaining balance.
💡 How to Avoid Defaulting on Your Car Loan
Missing one payment can set off a chain of events, but there are ways to avoid defaulting on your car loan entirely. Here’s how to stay on top of your payments and keep your financial situation under control:
1. Contact Your Lender Early
📞 If you realize that you’re going to miss a payment, contact your lender immediately. Many lenders offer options for payment extensions or temporary forbearance during difficult financial times. The earlier you reach out, the more likely it is that the lender will work with you to find a solution.
💡 Tip: Lenders prefer to work with borrowers to avoid default. Let them know as soon as you anticipate a payment issue.
2. Create a Budget
💡 Budgeting is an essential part of managing your finances and making sure that your car loan payments are covered. A well-organized budget allows you to prioritize essential expenses like your car loan while cutting back on non-essential spending.
💡 Tip: Use budgeting tools or apps to track your income and expenses and ensure that you have enough to cover your car payment each month.
3. Refinance Your Loan
🔄 If you’re struggling to make your payments due to high interest rates or an unaffordable monthly payment, consider refinancing your car loan. Refinancing can help lower your interest rate or extend your loan term, which can reduce your monthly payment.
💡 Tip: Consider refinancing if you’ve improved your credit score since taking out the original loan. A better score may help you secure better loan terms.
4. Consider a Payment Plan or Settlement
📝 If you're facing significant financial difficulties, you may want to inquire about payment plans or loan settlement options. These arrangements allow you to pay back your loan in a more manageable way, possibly by reducing the total balance owed.
💡 Tip: Some lenders may be willing to accept a lump-sum payment for a lower amount than you owe in exchange for paying off the debt quickly.
5. Sell the Car or Trade It In
🚗 If you can no longer afford the car and don’t want to risk repossession, consider selling the car or trading it in for a less expensive model. This can help you pay off the loan and avoid further issues.
💡 Tip: If you trade the car in, the dealership may apply its value toward the remaining balance of your loan, helping to reduce your overall debt.
🧑💼 Why Work with a Financial Advisor?
If you’re struggling to make car payments and need guidance, it might be helpful to work with a financial advisor. Advisors can help you create a budget, assess your financial situation, and come up with a strategy to avoid defaulting on your loan.
💡 Tip: A financial advisor can help you make tough decisions, like whether it’s time to sell your car, refinance your loan, or make other adjustments to improve your finances.
🔑 Final Thoughts
Missing a payment on your car loan can have serious consequences, including late fees, damage to your credit score, and the risk of repossession. However, by acting quickly, contacting your lender, and exploring options like refinancing, you can avoid default and get back on track with your payments. Staying on top of your finances and taking proactive steps will help protect your credit and your vehicle, and ensure you’re in a better position to manage your loan.
DISCLAIMER
The information provided on this website is general in nature only and has been prepared without considering your financial needs, circumstances and objectives and should NOT be construed as financial, taxation or legal advice. For more information, get in touch with our experienced partner brokers today.
