Laws About Defaulting on a Car Loan

Most people finance the purchase of a new or used car through a car loan. The terms of the loan will vary by lender, but many aspects of all car loans are similar. When a loan is used to purchase a vehicle, the vehicle itself acts as collateral to secure the loan. If the borrowers default on the loan, the lender has the right to reposes the vehicle in most cases. The majority of laws concerning car loan default can be found in Article 9 of the Uniform Commercial Code. Some states also have specific laws concerning this.

Features

After you have been approved for a car loan, the lender will require you to sign several documents. One of these is the loan agreement. This document explains the details and terms of the loan and defines important terms. The term default can have different meanings to different lenders. However, it basically means that the loan is past due by a certain period of time. Most lenders consider 30 to 60 days the time frame for default.

Notices

If the borrower has fallen behind on payments enough to constitute default, the lender will begin the repossession process. Generally, state laws determine if the auto loan lender must provide the borrower with a notice of default. Some states have this requirement, while others do not. If your state does not require the lender to send a notice to you, then your car may be repossessed without warning.

Repossession

Some states require the lender to provide advance notice to the borrowers of when they will be coming to seize the car. In some cases, the county sheriff may need to supervise the repossession. However, it is usually fairly simple for the lender, or a third party hired by the lender, to complete the task. A stipulation is that the lender cannot commit a breach of peace. This would include physical harm or threats and property damage.

Post-Repossession

Once the vehicle is back in the lender's possession, it can re-sell the car to account for the money lost on the loan. Typically the car will be sold at a public auction or private sale. Some states require that the borrower must be notified of the sale. In certain cases, the borrower may even be able to bid on the car at the auction. If the car sells for less than what is owed on it, the lender has the right to sue the borrower for a deficiency judgment in most states. For example, if the loan balance was $15,000 but the car only sold for $12,000, the lender could sue the borrower for $3,000.