What Happens if You Miss Auto Loan and Car Insurance Payments?
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In September 2023, the percentage of auto borrowers who were at least 60 days late on their bills rose to 6.11%, according to a Fitch Ratings report. That is the highest default level in nearly three decades.
Taking out an auto loan is how many people finance their vehicles, especially when buying newer cars. These loans are typically provided by banks, credit unions, manufacturers or financing companies, allowing you to spread the cost of a vehicle over several years at an interest rate, which varies according to credit score and special offers from the manufacturer.
While an auto loan can make purchasing a car more affordable, it also comes with responsibilities. Making regular, on-time payments to repay the loan is crucial. So is continuing to pay for full-coverage car insurance, which is required when you take out a loan.
Missing auto loan and car insurance payments can have severe consequences, including financial penalties, damage to your credit score, and, in some cases, vehicle repossession. Here’s what happens when you miss auto loan payment and car insurance payments.
The Impact of Missed Car Loan Payments
Missing a car loan payment can have serious consequences, and the later you are the worst it will be. A grace period for being late is usually not more than seven to 10 days.
Here are some things that happen when you don’t pay your car note.
Penalty Fee for Non-payment
Missing even a single auto loan payment will result in late fees. The specific amount of the late fee can vary between lenders, but generally ranges between $20 and $50. You can see what your penalty will be in the terms of your loan agreement.
If you are 30 days late or later, the lender will contact the credit bureau, and this will hurt your credit. See more below.
Impact on Your Credit Score
Payment history is 35% of your credit score. Aside from a home, a car loan is one of the more expensive payments people make. Therefore, a missed payment will have a heavy impact on your credit.
- After 30 days of non-paying of a car note, the credit bureau will be notified by the lender.
- After 60 days, the credit bureau will be contacted again. The impact on your credit score this time will be even greater.
Credit bureaus track your payment history, and even a single missed payment can lower your credit score by as much as 180 points and may stay on your credit reports for up to seven years.
A low credit score can cause your interest rates to soar, making everything you finance more expensive. You’ll also pay higher insurance premiums with bad credit because you’ll be seen as carrying more risk.
After the 60-day mark is when lenders begin to take actions towards repossession and other legal action.
When you miss a payment, interest continues to accrue on the outstanding balance. This can result in a higher overall cost of paying off your loan.
If you continue to miss payments, the lender will repossess your vehicle. The lender can also repossess the car if you miss car insurance payments. They will then sell the vehicle to recover the remaining loan balance.
Repossession laws vary by state. In California, for example, a lender can start the repossession process after one missed payment.
Repossession of a car means that it can be towed without any warning or you may be given the option for a voluntary repossession, where you turn the car in yourself. The latter option is preferable because you’ll owe fewer fees.
After your car is repossessed, a lender may also sue you to recover losses from your nonpayment, including collection and towing fees, if they apply.
What to Do if You Miss Auto Loan Payments
1. Review the Loan Agreement
Your loan may come with a grace period, giving you more time to make a payment without penalties.
2. Contact Your Lender
If you can't make an auto loan payment, contact your lender immediately. Some lenders are willing to work with you by forgiving one late payment or creating a payment extension or a loan modification.
Loan deferment is an option for a single missed payment. The missed payment is pushed to the end of the loan term, and will only pay the interest owed that month.
3. Create a Budget
A budget can help you manage your finances effectively to ensure that you have enough money in your account each month for a car payment. If possible, authorize your lender to do automatic withdrawals from your bank account towards a car payment each month so you don’t miss another payment again.
4. Consider Refinancing or Trading in Your Car
If your problem is bigger than a single incident of being unable to pay the car note, you should consider refinancing the loan to make it more manageable. Or you can trade it in for a less expensive car.
Car Payments and Car Insurance
In most states, auto insurance is a legal requirement. If you have an auto loan, your lender will require you to have comprehensive and collision coverage in addition to state-mandated liability coverage. This is to protect the lender's financial interest in the vehicle if it is damaged or stolen.
Do I Need Gap Coverage?
You should consider gap insurance, which is optional, if you have an auto loan on a newer car. It covers the "gap" between the vehicle's actual cash value and the remaining balance on your loan if the car is declared a total loss. Without gap insurance, you will owe whatever remains after the insurance company pays the value of the car according to its Kelley Blue Book value the day of the loss.
Repossession Due To Being Uninsured
If you are uninsured or get dropped by your insurer and do not find another policy, the lender can repossess the car. However, what they usually do first is buy a policy on your behalf and bill you for it along with the car payments. If you default on the payment, they can take possession of the car.
Lenders are not in the business of saving you money so compare car insurance rates yourself and buy your own car insurance policy.
Car insurance protects your interests because without it, you’ll have to pay for all repairs after an accident that is your fault, and you’ll have to continue making payments for the car even if it is totaled or stolen.