When Does an Auto Loan Go Into Default?

When Your Payment is Late

Your auto loan goes into default once you miss a car payment. Grace periods offered for late payments differ by lender. Read your contract over to determine how much time your lender offers for late payments before it starts the repossession process, assesses late fees or reports your non-payment to the credit bureaus. Some lenders consider a loan in default as soon as a borrower misses a payment, but often, lenders will not act or penalize a borrower until his payment is at least 30 days past due. Call your loan provider to determine its rules.

When You Fail to Maintain Insurance Coverage

Most lenders also require a continuous full-coverage insurance policy on your vehicle until the loan is satisfied. If you do not maintain this coverage, you failed to abide by your loan contract agreement. Insurance companies electronically notify lien holders and the state motor vehicle department if your policy cancels or lapses. Repercussions for lack of required insurance are also outlined in your contract, but may include repossession. Some lenders may add an insurance policy to a car loan, which increases your car payment.

When You Don’t Pay Your Loan Balance

Your contact also states your responsibility to fulfill your loan balance. If your vehicle becomes a total loss, your full-coverage insurance policy pays your lender for the car’s market value without regard to your total loan balance. If your car’s market value doesn’t pay off the loan, you must complete your payments or satisfy the loan in full. If your vehicle is repossessed, you must also satisfy the loan amount. Once your vehicle is repossessed, your lender resells it to minimize its loss. If the sales price doesn’t satisfy the loan balance, your lender can pursue legal action that may result in wage garnishment if you do not pay.

Credit Reporting

Potential lenders that view your credit report can identify a past-due loan account. If you’re past your grace period for payment, your account is likely reported as past-due to the credit bureaus. Potential creditors are not likely to extend a loan or line of credit while an auto loan is in default. To ultimately determine if your credit is affected by your non-payment, obtain a copy from the credit bureaus. Even if your loan becomes current, the late payment remains on your credit report as part of the loan’s payment history.

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