What is the Difference Between Car Loan Default and Charge Off?

Jun 10, 2024

Due to increased living costs, and higher loan amounts, most Americans are finding it difficult to keep up with their car loan payments. Vince Shorb, the CEO of the National Financial Educators Council, mentioned that many borrowers are defaulting on their car loans due to excessive interest rates. He also highlighted the impact of rising costs on borrowers’ ability to make payments. With increasing car loan debt, it is important for both the lenders and borrowers to be aware of the difference between car loan default and car loan charge-off. This article will explore these critical distinctions, helping lenders and borrowers understand the implications of each scenario. 

Car Loan Default vs. Car Loan Charge-Off

While both car loan default and car loan charge-off involve missed payments on your auto loan, they represent distinct stages in the delinquency process. Each stage carries significant consequences for the borrower. Here’s a detailed breakdown of the key differences:

Car Loan Default

A car loan default occurs when you miss a certain number of car loan payments, typically around 30 to 90 days past due. This signifies a breach of the loan agreement with your lender.

Impact of Default

Late Fees: You’ll be charged late fees for each missed payment, increasing the overall amount you owe on the loan.

Credit Score Damage: In most cases, defaults are reported to credit bureaus and can significantly damage your credit score. This makes it harder and more expensive to borrow money in the future due to higher interest rates.

Collection Efforts: The lender may initiate collection efforts to recover the missed payments. This could involve:

  • Phone calls and letters: The lender or their representatives will likely contact you to remind you of the missed payments and urge you to make a plan for repayment.
  • Collection agencies: In some cases, the lender outsources debt collection to a third-party collection agency, specializeing in recovering unpaid debts. These agencies typically employ various strategies and techniques to ensure the repayment of outstanding loans.
  • Repossession Risk: If the default persists, the lender has the legal right to repossess your car to recoup their losses through selling it. State laws may require the lender to follow specific procedures before repossession, such as providing a default notice.

Car Loan Charge-Off

A car loan charge-off happens much later in the delinquency process, usually after 120 to 180 days of missed payments. At this point, the lender considers the debt a loss on their financial records, essentially giving up hope of collecting the full amount owed.

Impact of Charge-Off

Severe Credit Score Damage: A charge-off will typically cause a more severe negative impact on your credit score compared to a default. It can stay on your credit report for up to seven years, hindering your ability to obtain favorable loan terms. This affects mortgages, credit cards, and other loans.

Repossession Still Possible: Even though the loan is charged off, the lender can still repossess the car. This applies unless you have already surrendered it voluntarily.

Debt Collection: The lender may sell the charged-off debt to any debt collection services, who will then attempt to collect the money from you. Remaining Debt: The debt doesn’t disappear simply because it’s charged off. You’ll still be legally obligated to repay the outstanding balance, including any late fees and interest that may have accrued.

It’s critical to comprehend the effects of a car loan default and charge-off and look into ways to lessen them. Being a recognizable BPO company that handles credit collections, we are aware of the difficulties people encounter when overcoming such obstacles. Our mission is to help creditors recover unpaid debts. We also offer insightful advice and support to anyone attempting to navigate the process of credit restoration and financial recovery.

Contact First Credit Services today for your credit collection services!

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