In the midst of rising car prices and interest rates, more consumers are struggling to pay their auto loans. In fact, a recent TransUnion study found that as of the second quarter of 2022, 3.34% of auto loans were more than 30 days delinquent, higher than in previous years.
Late car payments can damage your credit and have other financial consequences. So how late can you be on a car payment? What happens if you miss a car payment? And how many car payments can you miss before repossession? Learn more about the impact of being late on your auto loans, and how to avoid repossession.
What Happens if You Miss a Car Payment?
“When you sign a financing or lease agreement on a vehicle, you agree to specific terms, which vary from lender to lender based on your credit, laws in your state and the type of lender involved,” says Michael Sullivan, personal financial consultant with nonprofit credit counseling agency Take Charge America.
Therefore, if you don’t make your payment as you agreed to do, it can trigger a number of actions:
- You’ll incur a late fee. Once you miss a payment, the first thing to expect is a late fee of $25 to $50, says Sullivan.
- Your loan is reported as delinquent. “A car loan is flagged as being delinquent, which is a remark on your credit report, after 30 days of non-payment,” says David Gelinas, practice administrator of National Legal Center, a New Hampshire-based law firm focusing on consumer rights and consumer protections. Some lenders may offer a grace period of around 10 days before reporting late payments to the credit bureaus, he adds, but not all lenders do this.
- Your credit will take a hit. Once your lender reports the delinquency to the credit bureaus it will affect your credit report and your credit score negatively. “A late payment remains on your credit report for seven years and that can cost far more in increased borrowing costs than a $30 late fee,” says Sullivan.
- Your car can be repossessed. A car loan is a secured loan, meaning the vehicle itself is collateral. If you don’t make your payments, the lender can take the vehicle from you.
- You can be sued. Even after your car is repossessed, a lender can take legal action to try to recover fees and losses from your nonpayment.
How Late Can You Be on a Car Payment?
Missing just one payment can sting, but once you go beyond that, you can start to see some more serious consequences.
“If the loan remains unpaid it will generally go into default, which means you’ve broken the contract,” says Gelinas. “This is usually in the range of 30 to 90 days of non-payment, depending on state laws and your loan agreement.”
With each missed payment, there will be another late fee as well, says Sullivan. And after 60 days, the lender will send a 60-day late notice to the credit bureaus, which has a greater impact on credit ratings and credit scores than a 30-day late notice. What’s more, the second missed payment increases the likelihood of repossession and legal action.
“The 60-day event is the critical moment in the eyes of financial advisors because the damage then becomes very significant and recovery options become very limited,” says Sullivan. “Even consumers who had good credit may now find it difficult to refinance the loan with another lender or find other sources of financing.”
How Many Car Payments Can You Miss Before Repo?
How long it takes for your car to be repossessed will vary depending on your loan agreement and applicable state laws, as well as the value of the vehicle “Some vehicles are repossessed shortly after default while others happen months or years later, often out of the blue,” says Gelinas.
In some states, as soon as you’ve missed one payment, your car is at risk of repossession. While some states require lenders to notify you before repossession and give you a chance to pay up, in others you may get no warning at all.
A lender will generally stop trying to recover a loan after it is more than 90 days late, Sullivan says. Lenders can sometimes be convinced to negotiate, especially in a climate where loan defaults are increasing and vehicle values are shrinking, but the longer you wait, the harder it gets.
As of late, with car values increasing, Gelinas says his firm has actually seen an increasing amount of collections activity for vehicles. “Repossessions have been on the rise not just because payments have become unaffordable, but also because lenders view these vehicles as a valuable asset worth pursuing more aggressively,” he says.
How Repossession Works
Repossession can happen in one of two ways. The most common is a tow truck will show up and haul off your vehicle – sometimes with warning, but usually without.
In other cases, you may be given the option to do a “voluntary repossession,” in which you surrender your vehicle to the lender. “Although this does generate some good will and reduces recovery costs and therefore amount owed, the benefits to the consumer are not significant unless a specific deal has been negotiated with the lender,” explains Sullivan.
Besides physically removing the vehicle, another tactic used by some lenders (if state law allows) is a starter interrupt device, which remotely deactivates a vehicle’s ignition system if a borrower misses payments or defaults, says Sullivan. “The shut-down can be temporary, until a payment is made, or it can be done to make repossession easier.”
Once your car is taken, your ordeal is not over. You may still be on the hook for related fees, such as towing and storage, and the lender can come after you legally to get them. Once you’ve defaulted, the credit damage will take years to undo.
How to Avoid Repossession
Repossession is the worst outcome for both the borrower and the lender. “Repossession can be a life-changing event for a consumer who was just holding on and got caught up in an emergency or illness or job loss,” says Sullivan.
Lenders typically lose money when they pursue a repossession.
“It costs money to repossess and sell a vehicle and they seldom sell for the amount owed since borrowers typically owe more on the vehicle than it is worth, especially after months of nonpayment,” says Sullivan. And trying to recover the difference from the customer through legal action is another expense, and one that’s not guaranteed to result in payment.
That’s why it’s best for all parties if repossession can be avoided using these strategies:
- Contact the lender before the first 30-day late payment. Explain the problem, like job loss or illness, and state your willingness to make all payments as soon as possible, advises Sullivan. This demonstrates a desire to pay, which may delay repossession efforts for some time.
- Negotiate the terms of your agreement. If you have decent credit and can make a reduced payment, ask to have your loan extended. The lender may add some months to the loan to compensate for missed payments, says Sullivan.
- Look for a refinancing opportunity. Especially if you’ve paid off most of the loan already, refinancing the last portion of the loan into a new, longer loan will cost you more over time, but it is still better than a repossession.
- Return the car. If all else fails, make arrangements to turn in the car on your own. “It saves a few dollars in collection fees that the lender cannot seek when pursuing a judgment in court,” says Sullivan.