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Falling behind on your car loan payments not only damages your credit score, but could also cause you to lose your car. And if you had a cosigner on your loan, they’ll be hit with the same repercussions. But there are steps you can take to avoid repossession when you’re facing default.
Your car loan could be considered in default after just 1 missed payment, though it varies by providers. Typically, most lenders won’t take steps to repossess your car until you’re 90 days late on a repayment. Your loan agreement should detail how many days you have to miss before your loan goes into default.
Here’s what could happen if you fail to pay back your car loan:
Just being late on your car loan repayment will likely lower your credit score. But going into default will add another negative mark to your credit report. If your car is repossessed, your account is sent to collections or your lender sues you, your credit score could take an even greater hit — dropping as much as 100 points in some cases.
Your car can be repossessed once your loan goes into default. However, your lender is required to notify you beforehand and give you the chance to catch up on payments first. If you’re unable to get out of default, your lender will likely seize your car and sell it at a fair market price.
If your lender sold your car for less than your outstanding loan balance, you’ll be on the hook to repay the difference — called the deficiency balance. You’ll also be responsible for paying any costs associated with repossessing your car.
Fail to repay the deficiency balance? Your lender might sell your debt to a third-party collection agency, which tries to get you to pay up. If you don’t, there’s a chance the agency could sue you for repayment.
The statute of limitations on car loans varies by province, ranging anywhere from 2 to 10 years. It applies only to unsecured debt, for example, if you got a unsecured personal loan to pay for your car. Once the statute of limitations on your loan passes, your lender no longer has the right to sue you for repayment. However, be aware that most car loans are considered a secured form of debt so the statute of limitations would not apply.
Probably not. In most cases, you’ll either need to surrender your car to your lender or continue to pay off your car loan according to a modified repayment plan.
If a family member or friend cosigned your car loan, they’re legally responsible for paying back your loan should you default. If they fail to do so, your cosigner will be hit with the same consequence you’re facing, including a lower credit score and the risk of being sued over an unpaid deficiency balance.
If you received a notice from your lender that your car loan is in default, you still have a few options to prevent your car from being repossessed. These include:
At the very least, defaulting on your car loan will cause your credit score to take a hit. You could also end up losing your car — or worse, getting sued. If you’re worried about defaulting or already have, there are steps you can take to get your finances back on track.
You can learn more with our guide to improving your credit score and establishing better credit.
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