When your vehicle's value exceeds your loan payoff amount, you can sell it to pay off your loan balance and avoided repossession. Unfortunately, distressed borrowers often owe more than their vehicle's loan balance. You must satisfy the remainder of your loan balance with your lender, as you promised in your loan contract.
Understanding the Resale Process
Once your lender has the vehicle back in its possession, expect a letter stating the amount you can pay to retrieve your vehicle and the date the lender intends to sell it if you don't make payment. Your lender will likely sell the vehicle at auction for wholesale value, which is similar to the trade-in value offered through online appraisal guides. The car's sale amount is then subtracted from your loan balance, which includes late fees. If the lender had to hire a repossession company to seize the vehicle, it also adds repossession fees to your loan.
Correspondence and Payment Arrangement
Once the vehicle sells and the lender determines the amount you owe, the lender will send you a letter stating the balance due and where to remit payment. Even though you no longer have the car, you're still responsible for paying the debt, as you agreed to when signing your lending contract. Call your lender to set up a payment arrangement if you can't pay the balance in full. Otherwise, the lender will likely transfer your account to a collection company, which will try to collect the outstanding debt.
Settling the Balance or Paying in Full
You might be offered a settlement by your lender or the collection company to satisfy the balance on your car loan. If so, the collection company or lender may require payment in full or it may allow a payment arrangement. If you decide to settle the balance, meaning you'll pay less than you actually owe, you'll satisfy your account and owe nothing more to your lender. The Internal Revenue Service considers the unpaid balance on your loan as taxable income. Expect to report the profit on your tax statement and pay taxes on the unpaid balance.
Consequences of Ignoring the Debt
Ignoring your debt may cause further damage to your credit report and score. A repossession alone significantly decreases your credit score. The lender may also sue you at a later date to collect the balance due on the loan. If the lender wins, it may pursue a judgment to garnish your wages, which is also reported to the credit bureaus. Unless you claim bankruptcy, expect the lender to make attempts to obtain the unpaid balance, even if years later.
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