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Information on Auto Loans & Repossession Advice

What will happen if I walk away from my current auto loan?

I have a car I pay $600 per month. If I buy another car with $300 payments and walk away from the $600 one what will it do to my credit?

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Bill's Answer
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If you "walk away" from your auto loan, your creditor will repossess the vehicle. When a vehicle is repossessed, the lender will sell the car at auction and apply the sale price at auction to the amount that you still owe on the original car loan. If the auction does not net enough money to cover the full balance of the note, which it rarely does, then the original borrower (you) would owe the difference, called a deficiency balance, to the lender. The creditor can collect on the deficiency balance like any other unsecured debt, up to and including filing a lawsuit against the borrower.

Repossession has a real adverse effect on your credit. You can expect this account to remain on your credit report for seven years from the date of the repossession, so you will probably be dealing with credit problems for some time to come.

You may be able to balance the negative impact of the repossession by keeping all of your other accounts current. However, even if all of your other accounts have a perfect payment history, repossession would still hurt your credit score. Luckily, the more time that passes from the date of the repossession, the less the repo will affect your credit score, so as time passes, you should see your credit score improve.

Deficiency Balance

Even if you surrender your vehicle to your lender voluntarily, the lender has the legal right to collect on any balance remaining on the debt after the car is sold at auction. This type of debt is referred to as a "deficiency balance." The creditor may even file a lawsuit against you to collect on the unpaid deficiency balance. You should therefore only proceed with a voluntary repossession if you truly cannot afford the loan, as you will likely still owe the lender a significant amount of money, even after you no longer have the use and benefit of the property.

A deficiency balance is an unsecured debt, which the law treats the same as credit card debt, a payday loan, or medical debt, among other consumer debts. To see your rights and options for resolving the deficiency balance, read the Bills.com Collections Advice resource.

For more information about credit, credit scoring, and credit reports, I encourage you to visit the Bills.com Credit Resources page.

Sincerely,

Bill

Bills.com

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26 Comments

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  • CR
    May, 2012
    Cliff
    Kula, HI
    I recently In-house financed a vehicle and within the first month got in an accident and it was totalled. So I returned to the same dealership (after insurance and gap insurance covered all of it) and In-housed financed another vehicle for a rediculous price. I owe about 7k on it and Just cant afford rent, bills, and the car payment at once and am planning to move off island, back home and start over again. So I need to walk away from my vehicle. How likely is it they will come after me with a lawsuit or sue me? My credit is already shot and am slowly but surely making payments to other credit card delinquencies so i'm not concerned with it becoming "more shot" but on the contrary I don't really want to have to settle this issue in court across the US.
    0 Votes

    • BA
      May, 2012
      Bill
      It is highly likely that the lender will pursue the deficiency balance, after the car is sold at auction. The larger the balance, the more likely they will pursue collections.

      Check into the collection laws in the state to which you are moving, so you know what actions the creditor can take, if you are sued and a judgment is obtained against you. Even if your credit is already shot, you don't want to have your wages garnished. It may be best for you to try to work out a payment plan, once you have the means to see one through.
      1 Votes

  • GL
    Jun, 2011
    George
    Bargersville, IN
    I am self employed and my income has dropped dramatically and I can no longer afford my 680/month RV loan. I am about 15,000 underwater on the loan (about 58,000 loan to 41,000 retail value). I have to cancel my health insurance because I can't afford 1,400 per month (due to age and pre-existing conditions). I have some savings and can cover the loan payoff if i can sell it. I have had it advertised for 4 months with no takers. What are my options?
    0 Votes

    • BA
      Jun, 2011
      Bill
      One options is to speak to your mortgage holder about a short sale. A second option, is to speak to them about a loan modification. A third option is to consult with a bankruptcy attorney. It is possible that a bankruptcy would allow you to retain possession of your residence and have the lien for the home equity loan stripped from the property. Consult with an attorney in your state who has experience in bankruptcy, to learn if this option addresses your needs.
      0 Votes

  • BA
    Mar, 2010
    Bill
    Lenders want three things in a perfect debtor: Stable income; Strong credit history; Low debt-to-income ratio. The 2003 vehicle harms No. 2 (you now have a voluntary repossession on your credit history) and No. 3 (you have a deficiency balance as a debt). If you are asking me to put myself in the shoes of an vehicle finance company, I would not extend you a loan until you clear up the mess relating to the 2003 vehicle. However, I am not your current vehicle lender, and your question is best answered by them.
    0 Votes

    • LR
      Apr, 2011
      Linda
      Worthington, OH
      Is anyone aware of what happens when the securitization chain is broken relative to NO ORIGINAL auto loan, lease documents that are missing, lost, destroyed by the banks along with the promissory notes of home mortgages-hard to repo what you cannot prove is yours with a WET Loan or Lease Agreement-any comments?
      0 Votes

    • BA
      Apr, 2011
      Bill
      I believe the legal action you are describing is a quiet title. This is a very old area of law that has received a great deal of attention lately. You should be able to find a lawyer in your state who is practicing in this area of law.
      0 Votes

  • TB
    Mar, 2010
    Tammy
    In March 2009, I went to trade in my 2003 vehicle for a 2006. When the dealer pulled my credit report there was no evidence of my 2003 vehicle payments, so I decided to keep the 2003 and let a friend takeover the payments with the car still in my name. So I had two open auto loans in my name with only one at the time reporting on my credit report. My friend lost her job a month later and could no longer make the payments, so I gave the 2003 back and kept my 2006. It has now been 1 year that I have had my 2006 car and I have never been late on one payment. I decided to try and trade it in for a newer vehicle. I found a car that I wanted, the dealer was giving me a great trade amount. When the went to run my credit it showed that I had two open auto loans. One with my current lender and one with my old lender. Because of this, I could not get the vehicle. What do you think my chances are of getting a newer vehicle if I fiance through the same company that I have my current auto loan with?
    0 Votes

  • BA
    Oct, 2009
    Bill
    I'm surprised the bank wanted you to bring the engine and other items to them. I would have expected the bank to want the engine and other parts to be brought to wherever the boat is stored. The boat is about to be auctioned, and you will be required to pay any deficiency balance. An engine-less boat is not going to fetch much at auction, and you having an engine without a boat does you little good. This is a big mess you need to sort out. Get a three-way telephone call with the repossession company, the bank officer handling your loan, and you to work out an arrangement for reuniting the engine with the boat. Then, you need to develop a strategy for handling the deficiency balance. The deficiency balance is an unsecured debt, and is like credit card or medical debt. See What Are My Debt Consolidation Options? and collections advice to understand your rights in the collections process.
    0 Votes

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