What Happens When an Auto Loan Defaults

When you default on an auto loan, the lender will send letters and make phone calls in an effort to contact you regarding your delinquent account. A lender wants to make arrangements with you to bring your auto loan current. Sometimes agreeable terms are met and other times they aren't. If your account remains in a state of default after numerous attempts by the lender to resolve the issue, they will look at other ways to collect your outstanding balance.

Repossession Process

If you ever default on an auto loan the lender will contact a third party to repossess your vehicle. When a repossession order is put through, the borrower can face additional fees including a repossession fee. Once the vehicle is repossessed the lender will send written correspondence giving the borrower a certain amount of time to retrieve the car. All fees, expenses and past-due payments must be paid before the auto will be relinquished to the borrower.

Auction

When a borrower is unable to come up with all money due, the lender will sell the car at an auction to the highest bidder. The proceeds from the sale will go toward the loan balance and the fees incurred by the lender. If there is a deficiency balance the borrower could be responsible for paying depending the state.

Judgment/Bank Levy

A lender could seek a judgment in an effort to collect a balance from the debtor. If a judgment is obtained, the lender has further ammunition to use to collect the balance. The lender could proceed with a bank levy which freezes a checking account, including all or a portion of the funds in the account. The bank is obligated to release the funds to the lender and the money will be applied toward the balance.

Garnishment

A lender could also garnish the wages of the borrower. The amount of the garnishment can vary from state to state, but usually it will be about 25 percent of the check amount. Any money taken from a pay check will be applied toward the deficiency balance.

Liens

As a last resort, the lender could file a lien on any real estate the borrower owns. There is a good chance that a lender won't resort to these extremes but the possibility exists. If the home is sold or refinanced, the lender will be paid from the proceeds of the sale. Liens aren't the quickest way to collect on a judgment but they can be effective over time.

Time Frame

Judgments and repossessions will show up on a credit report for seven years and will drop a credit score significantly. The exact amount a credit score is decreased will vary. A repossession will most likely keep someone from being approved for credit in the near future. Some lenders are willing to take a chance and advance you credit, but the interest rate will be high and there will be a number of fees.