What Does It Mean When a Delinquent Auto Loan Account Is Charged Off?

Any account delinquencies can have a negative effect on your credit report. However, auto loan delinquency can be particularly problematic, because its a secured debt. Unsecured debt, such as credit cards, doesnt have a piece of property to back it up if you default on your payments. Secured debt, such as home and auto loans, has your home and auto to back it up -- a fact your bank knows well.

Definition

When an account is charged off, whether its a delinquent auto loan or otherwise, it doesnt mean that you no longer owe any money. Instead, it means the bank servicing the auto loan has written the loan off as a bad debt because youve been so delinquent in paying it. Its no longer part of its accounts, and the bank is free to send either an in-house collection agency or a third-party collection agency after you to recover its money.

Timing

Creditors have different amounts of time after which they charge off your account. Consult with your bank to learn its specific policies or consult your copy of the papers you signed when you took out the auto loan. The time may range from 90 to 180 days. Another important time frame to keep in mind is how long a charge-off of any kind can stay on your credit report legally. According to the federal Fair Credit Reporting Act, a charge-off can stay on your credit report for up to seven years after the date of last activity.

Effects

Having charge-offs on your credit report can make it difficult to obtain additional credit, especially if you havent made any effort to pay them off. Since the item in question is an auto loan, you also run the risk of having your auto repossessed if the loan gets charged off. The bank technically owns your auto and is holding the title in trust for you until you pay the loan off. If you renege on your agreement to pay the loan, your bank is under no obligation to honor its part of the agreement, either.

Considerations

Each state has its own rules about the statute of limitations allowed for collection of funds on charged-off accounts. These rules may vary for secured loans -- such as your auto loan -- and unsecured loans such as credit cards. Check with your state government to find out the most current laws regarding financial statutes of limitations. Also, the date of last activity means just that. If you enter into a payment agreement with a collection agency to bring your account current, each new payment is considered the last activity. In general, its advisable to pay your auto loan as consistently as possible so you can eventually own the vehicle. However, financial expert Suze Orman advises that if a charged-off debt is close to reaching the statue of limitations, you may be better off financially by lying low and letting it slide unpaid. If youre uncomfortable with this idea, she advises you to consult a lawyer to see about reaching a settlement with the creditor in question to pay all or part of what you owe on terms that are favorable to your current financial situation.

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The Benefits and Pitfalls of Leasing Cars

Leasing is a way to finance the acquisition of a new or used car. With a lease, you do not pay for the complete purchase price of the vehicle; you pay for how much you have used the vehicle. It is essentially a long-term car rental. You must determine if a lease is right for you, or if you would be better off buying a vehicle.

Benefit: Lower Up-Front Costs

Often with a lease, the dealer will not require a down payment. With many leases, you pay your first month's payment and a security deposit before you drive off. You may have to add in a few fees, but it should still be less than you would have to pay for a new car. In most states, you will see a sales tax savings because tax is paid on each payment, not the entire purchase amount.

Pitfall: High Surrender Fees

When you first lease a car, the salesman will tell you the benefit you will receive from just being able to drop off the car and move on. It sounds so simple. Be careful. You can end up with some high surrender fees on many leases. You may be charged a fee for every mile over your allotted mileage. Some leases also have lease termination fees that they charge just for the privilege of walking away. Some leases also require you to have a new state safety inspection before you can walk away. You will need to have any repairs completed that are required for this inspection.

Benefit: You Drive a New Car More Often

With a lease, you can arrange to drive a new car every two to three years. Models change quite a bit in that amount of time, and with a lease you can always be driving a new up-to-date vehicle. For some people, this is extremely important. Your vehicle generally stays within the manufacturer's warranty, reducing your cost of repairs and the risk of breakdowns.

Pitfall: You Never Truly Own Anything

This might not seem like a problem to you right now, as you can always just pick out a new car when the lease is over. But in three years, you could feel very differently, and your entire financial situation could change. What if you no longer qualify for credit when it is time to get a new vehicle? You could be in trouble. Also, when you are purchasing a vehicle, eventually the payments stop and you still have a vehicle to drive.

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How to Get Back a Cash Deposit When Buying a Car

Car dealerships will not keep your deposit if you purchase a vehicle, but if you want your money back from a dealer or private seller after deciding you no longer want the car, you should read over your receipt to see your rights. Have the seller write "deposit refundable if buyer changes mind" on your receipt, or pay with a credit card so you can dispute the charge, if necessary, with your credit card company. You need to know how you can get your deposit back when shopping for a car.

Instructions

1

Reduce your purchase price by the deposit amount if you intend to buy the car you left a deposit for. If you are worried about the seller not returning your deposit amount, just subtract it from the purchase price. If you're buying from a dealership that provides your loan, refuse to sign your contract until the loan amount reflects your deposit refund.

2

Leave your deposit on a credit card. If the dealership won't refund it, call your credit card company to dispute the charge. If you left the deposit by check and it hasn't been cashed yet, stop payment on the check by calling your bank.

3

Do not leave a deposit without obtaining a receipt, especially if you're leaving cash. Ask the seller to state that the deposit is refundable. If he refuses, do not leave the deposit.

4

Ask to speak to a sales manager before taking further action if a dealership will not refund the deposit. Tell the sales manager you will contact your state's Better Business Bureau division. Also say that you will put in a complaint with the division of your state's motor vehicles department that handles dealerships. You most likely will receive your deposit back if you know whom to send your complaint to.

5

Call your state's motor vehicles department if a dealership does not return your deposit, and make sure the dealer knows you've done this. Because the state regulates dealers, making a phone call asking for an investigation can motivate or require a dealership to refund your deposit immediately.

6

Check with your county's small claims court to take further action if none of the previous methods were effective. However, if the dealership ordered a vehicle for you, or you drove it during the time your sale was pending but changed your mind, the dealer may be legally entitled to keep your deposit or a portion of it.

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Auto Leasing Pros & Cons

A car dealership will often offer a customer the choice to purchase or lease a car. With a car lease, the customer receives the right to operate the vehicle for several years while making payments on it. At the end of the lease term, the customer may decide to purchase the vehicle or return it and buy or lease a new car. Both a purchase and a lease have advantages and disadvantages.

Convenience

One advantage of an auto lease is that it allows the car buyer to avoid getting stuck with an older vehicle that is difficult to sell. A buyer who purchases a more expensive car may still want to buy a new car in five years, so the buyer will have to sell or trade in the old car. With an auto lease, the buyer can simply return the vehicle and let the dealer worry about selling the used car.

Lease Conditions

A car lease places conditions on the buyer. It often restricts the number of miles the driver may drive the car each year. According to the Federal Reserve, a typical mileage limit is 12,000 to 15,000 miles per year. The driver must also maintain the vehicle in good condition, which includes following the automaker's recommended schedule for oil changes and maintenance, or the driver must pay additional charges at the dealership when returning the car.

Monthly Payments

One advantage of leasing a car is that it is cheaper than purchasing a car. Since the lease payments are typically lower than the purchase payments on a new car, the buyer can either make smaller payments or drive a fancier vehicle for the same price. A lease only requires a buyer to pay a portion of the car's full value, but a purchase requires the buyer to pay the entire principal value of the car upfront or over a period of time.

Ownership Advantages

A benefit of a purchase is that once a car buyer purchases a car, the car buyer owns the car. The car driver can drive the car an unlimited amount of miles in a year. The car driver can also delay maintenance, get into accidents and cause additional damage to the car without incurring any additional liabilities to the dealership. A car buyer who plans to keep the car for more than a few years usually saves money by purchasing the car outright.

Down Payment

A disadvantage of a car purchase is that it often requires a large down payment to avoid high interest charges. A lease will still require a down payment, but it will be smaller than the down payment for a purchase. A customer may not qualify for a loan to purchase a vehicle, yet qualify to lease the same vehicle.

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Can They Put a Lien on My House If They Repossess My Car?

There are two legal components to an auto loan. The first component is your unconditional promise to repay the money you borrow. The second component is a lien on your car that you grant to the lender as security for the loan. When a lender repossesses your car, it may not be worth enough money to pay off the full amount of the loan, which could result in further legal action, including, potentially, a lien on your house.

Repossession

Repossession is the lender's exercise of its lien on your car. The lender has the right to take your car back and sell it, then use the money earned to pay off as much of your loan as possible. In many cases the car does not sell for enough money to pay off the full balance on the loan. The amount remaining unpaid is called a deficiency, and you are legally responsible for repaying the deficiency even though the lender has already repossessed.

No Automatic Lien

While an auto lender may potentially obtain a lien on your house, the lender does not have an automatic lien on your house like they do on your car. The lender must go through an extensive legal process before a lien on your house even becomes a possibility.

Deficiency Judgment

A lender can file a lawsuit against you to recover the deficiency that you still owe after a repossession. You can defend yourself in that lawsuit by arguing that the lender has understated the value of your car and that you don't actually owe a deficiency. Ultimately, either a judge or jury will decide whether you are liable for the deficiency. If the court finds you liable then the lender will get a judgment ordering you to pay the deficiency amount.

Judgment Lien

If you still refuse to pay the deficiency even after the lender obtains a judgment against you, then the lender can exercise the judgment by obtaining a lien on your house. In most states, the lender can create a lien by simply filing a copy of the judgment in the county land records for the county where your home is located. Additionally, the lender can ask the sheriff's department to hold a sheriff's sale on your house. The sheriff will sell your home in a public auction, pay off all liens on your house and then return the excess money to you.

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Can a Vehicle Be Financed for an Amount That Is Greater Than Its Value?

When taking out a loan on a vehicle or real estate, the lender will determine your loan to value ratio, defined as the amount of the loan compared with the worth of the property. Value includes the vehicles fair market value minus the equity you have in it. You can finance your vehicle for more than you paid for it under limited circumstances through institutional lenders, but most dealers are reticent to offer such deals.

New Vehicles

Some car dealers will roll over fees onto the amount of a vehicle loan, which can leave you with a note worth more than the purchase price of your vehicle. These rolled over charges can include transfer and trade-in taxes and title, registration, documentation and advertising fees. Dealers typically only offer these loans to the most creditworthy borrowers. They mitigate their risk of issuing a loan greater than the value of the vehicle by offering you a higher interest rate or fewer discounts.

Refinancing

If you have trouble making monthly payments to a dealer, you may use a lender to refinance your vehicle loan. Refinancing will replace your existing loan terms with a different interest rate and monthly payment. You will usually finance your vehicle for the remaining value of your vehicle loan. Because most vehicles depreciate 10 percent to 20 percent in the first year of ownership due to obsolescence and use, the fair market value of your vehicle is typically higher than the existing balance of your loan.

Considerations

If you purchase a vehicle with a high resale value and have excellent credit, a select few lenders may offer you a loan in excess of the vehicles fair market value. For example, Wells Fargo allows customers to take out a loan on the value of their vehicle up to a 160 percent LTV ratio. This means that a vehicle worth $10,000 can be financed for $16,000. These loans carry a high risk of default, and banks have a lower risk of recovering their loan due to depreciation and wear. You will have to shop around, because most lenders will only allow up to a 80 percent LTV ratio.

Kickbacks

When you purchase a car from dealers, they usually offer promotional offers that can include cash back at signing. For example, a dealer may offer 0 percent financing or 4 percent financing with a few thousand dollars cash back. If you choose the latter option, you are essentially financing the vehicle for more than its value, because you will receive cash upfront but pay more in interest over the life of the loan.

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What Percent of My Income Should I Spend on a Car?

Buying a new car can be fun, frightening, exciting and a whole host of other emotions. Sometimes, we get caught up in the moment and end up in a car that could be impractical for our needs, too much money for us to spend or both. Before shopping for a car, it is important to determine how much we can spend.

Determine Your Spending Limit

Figure out how much you personally can spend each month on a car payment, if you are getting a car loan. The bank may qualify you for more than this amount, but the bank doesn't know how much you spend on food, whether or not you have a hobby you love that you spend money on or how much traveling you do for your daughter's soccer games. You need to come up with a monthly amount that you can spend without breaking your budget. Experts say that your monthly debt-to-income ratio (not including mortgage) should be no more than 20 percent. You can add up all of your debts and see where you fall. If you are already over that percentage, it may be wiser for you to save up and pay for a car with cash.

The bank or finance company will determine your debt-to-income ratio. This does not include your rent, food, utilities or those types of expenses. This is how much you owe in debt compared with how much you take in each month. While this will tell the bank about your debt, it doesn't help you if you have extensive bills in other areas.

Add up all of your monthly bills and include money for savings in the equation. Find out for what amount the bank will approve you. Let them know what monthly price range you are looking at and only look at those cars--do not be tempted otherwise.

Remember you will be paying for tax, title and registration, in addition to the car itself (often these things are rolled into the loan). You will also have the additional expenses of gas, insurance and maintenance on a new (or new to you) car. Be sure your monthly budget can handle these additional expenses.

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