Missing a car payment can be a big deal, so try to avoid it as much as possible. If you know that this is a temporary issue, don’t be afraid to ask the lender to defer payment for one to two months. If you know that you’re going to miss more payments, consider refinancing your car or selling it privately. This article will walk you through the three most common consequences of missing a car payment and give you options on how to deal with it.
Written by Attorney Serena Siew.
Updated May 3, 2021
If you’re reading this article, congratulations on being proactive! Missing a car payment can be serious, but it doesn’t have to be fatal. If you can cover the missed payment and late fee, you can keep your car. Even though missing even one payment can put you at risk of repossession, don’t panic yet.
This article will walk you through the three most common consequences of missing a car payment and give you options on how to deal with it. Let’s start with two basic rules:
First, be honest with yourself in deciding if your budget can afford future car payments. Consider your entire financial situation and your credit score.
Second, communicate with the lender even before you fall behind so you won’t be caught off-guard. Read on to prepare yourself further.
1. Your Car Might Be Repossessed
After missing just one car payment, your car may be repossessed. How soon and how much notice the lender must give you depends on the state. Some states require a longer grace period before repossession. But in general, if you owe on a car loan. the lender can take back your vehicle. After all, if you borrowed money from a financial institution, you’re expected to pay it back.
Although monthly payments, plus interest, are spread out over the loan term, missing or late payments are not easily forgiven. Some lenders may offer a grace period, especially during the pandemic, but others can disable the car remotely before repossession even begins.
An auto loan is “secured” by the vehicle and secured creditors can repossess the car if payments are not made. Delinquency on a car payment just gives lenders a reason to send out the repo man (or woman) to retake it. You won't know when this person is coming. But you will get notice telling you where your car is and instructions on how to get it back. Once you get to the repo lot, be ready to pay the balance due on the loan. If you can’t pay what remains on the loan, plus interest, your car might be sold at public auction.
You can get your car back in one of two ways. You can either redeem the car by paying the car’s value in a lump sum or reinstate the loan by agreeing to make payments in the future. Redemption is better if you can scrape together enough money to pay off the lender. Reinstatement is more accessible only if your missed payment was a one-time deal. It’s not worth it if you can’t afford to make future payments by the due date. If you simply missed a payment by mistake, consider setting up automatic payments to avoid problems in the future.
2. You Might Owe a Deficiency Balance
If your car is repossessed, the lender can ask you to pay the full balance due on the existing loan, as well as any unpaid interest to get it back. Upfront. The lump-sum also includes any towing and storage fees as well as a public auction fee. Together, this is often more than the car is worth. If the Kelly Blue Book value of your car is less than what you owe the lender, paying off the value of the car is cheaper than being saddled with the larger amount owed on the loan. This type of redemption - where you only pay for the value of the car - is possible only as part of a Chapter 7 bankruptcy and then typically only if the case is filed before the repo.
If you can’t redeem your car by paying off the balance, your car will be auctioned. But if the sales price does not cover all the extra expenses listed above, the lender can sue you for the difference. This “deficiency balance” is the difference between the amount left on the loan, plus repossession fees, and what the car fetched at auction.
If you’re being sued for the deficiency balance on your car loan, the lender must notify you of the lawsuit via a summons. Being served with a summons alerts you that a complaint has been filed in civil court. The legal document also gives you a deadline to respond.
If you receive a summons, don’t ignore it! Find the best way to answer the summons and make sure you show up for court. If you don’t, a default judgment will be entered against you. Once they have a judgment (default or otherwise), the bank can garnish your wages to pay for the deficiency balance.
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3. Your Credit Score Will Take A Hit
Your credit score reflects your credit history. It's a three-digit number generated by credit bureaus on a credit report. The higher the number, the more likely a borrower is to get a loan, credit, or lease. A bad credit score makes it harder to get approved for a loan at a decent interest rate. Payment history makes up more than one-third of your credit score, so you’ll definitely take a ding for missing a car payment. On your credit report, lenders can even see how many days you’re past due on a loan and on how many accounts. If you’ve only missed one car payment and have no other types of debt, your credit score may still take a hit.
Imagine the average credit score is between 670 and 740. Now deduct 100 points if your car gets repossessed. You can see how significant a missed car payment can be. Like a parasite, repossession can also live on your credit report for up to 7 years. Be proactive about your credit score and learn how to get free credit reports from Experian, Equifax, and TransUnion. Always consider your credit score when deciding whether your car is worth saving.
What To Do If You Know You Can’t Make A Car Payment
If you know you can’t make a car payment, don’t panic. But do take action. First, call your lender and be up front. It’s much easier to resolve this issue if you are honest. Lenders want you to succeed in making your car payments. You might also be able to negotiate a one to two month deferment on your loan. This postpones the due date, giving you some time to come up with the money.
Second, be realistic about your financial situation. If you know that the current repayment terms are going to be out of your budget for some time, one or two months will not make a difference. You can try to refinance your car by looking for a lower monthly payment with another lender or you might have to give your car up. You can either sell the car privately or through public auction or return it to the dealership in something called “voluntary repossession.”
In that case, also make sure to step back and consider the big picture. Is a missed car payment a single incident or are you having financial difficulties in other parts of your life? If so, bankruptcy could be the right option. Although you don’t necessarily need a lawyer to file for bankruptcy, working with a local lawyer can help you explore your options and decide if bankruptcy is the right answer for you. If you can’t afford a lawyer, you may be able to use Upsolve’s free tool to file for bankruptcy yourself.
Missing a car payment can be a big deal, so try to avoid it as much as possible. If you know that this is a temporary issue, don’t be afraid to ask the lender to defer payment for one to two months. If you know that you’re going to miss more payments, consider refinancing your car or selling it privately.
Be mindful of the car’s value, though, because the only way to prevent a deficiency balance is to pay off the loan (including all fees, interests, and costs) in full. Selling the car for less than what is owed, or giving it back to the bank through a “voluntary repossession” will not protect you in the long run.
Finally, if this is not the only debt you’re struggling with, filing for Chapter 7 or Chapter 13 bankruptcy can also offer debt consolidation and relief. You might even be able to redeem your car for its current value (not the full balance owed) in the process.