A good credit score takes years to build, but only months to lose. Every year, thousands of car buyers succumb to these myths about auto loans, but knowing the truth can save borrowers money and stress.
The Car Doesn’t Run Anymore
Every auto loan has a clause that stipulates that the signer agrees to pay the full amount borrowed, plus interest, even if the car is inoperable or destroyed. What that means is, if the vehicle isn’t running for any reason, the borrower is still expected to make timely payments, even if the vehicle is stolen or wrecked and the borrower no longer has it.
The Payments Shouldn’t Be This High- Promised a Lower Interest Rate?
Many people sign contracts without reading them first. This is especially true when purchasing a car because the process is so long and drawn out, with endless pages of documents to sign.
Dealers count on that to get people to sign for loans with higher interest rates than what was verbally agreed upon or to unknowingly purchase additional ancillary products, such as extended warranties, protective coatings for the exterior or upholstery of the vehicle, and others.
Turning the Car in to Avoid Paying Off the Loan
Repossessed vehicles are sold to the highest bidder at private auctions, open only to dealers. The winning bid is usually well below the wholesale value of the vehicle and, because cars depreciate so quickly, the borrower almost always owes more for the vehicle than what it’s worth.
The difference between the auction proceeds and the balance still owed on the loan is known as a deficiency balance, which the lender can collect on by suing the borrower to obtain a judgment for the deficiency balance, plus court costs and attorney fees.
This balance continues to accrue interest until paid in full. Once the lender has a judgment, they can garnish the borrower’s wages, seize bank accounts and place liens on assets, such as a home, boat or other vehicles.
Co-Signers Also at Risk
This is one of the biggest mistakes that people make. Lenders report all parties on a loan exactly the same with the credit bureaus, with no distinction as to who is the primary signer and who is the co-signer.
Because the lender may take the same action against a co-signer that they can against the primary, it is unwise to co-sign loans for others, even family members.
Financing a vehicle for a third party to drive and pay for it is known as a “straw purchase.” This is illegal in all fifty states and is considered fraud.
Under most contracts, it’s also grounds for default; in other words, if a lender learns that a third party not on the loan drives the vehicle, they may repossess it even if the loan is not delinquent in order to protect their investment.
Hide the Car So There’s no Repossession on a Credit Report
Repossessing secured collateral for non-payment is a lien holder’s right and they may take legal action against the borrower, such as filing a replevin (also known as writ of possession) to force the surrender of the vehicle, or charging the account off and accelerating the loan, which means that the lender is now demanding the full loan payoff and not just the delinquent amount. They can then obtain a judgment and garnish the borrower’s wages, in many cases collecting far more every month than what the car payment would’ve been.
In addition to that, the lender may report the loan status as “Subscriber cannot find” or “P&L writeoff.” These are black flags that show potential creditors that the borrower has defaulted on a debt and skipped out on his obligations.
To some lenders this is worse than a repossession because lenders approve loans knowing that at any time the borrower may default, but there is less risk with a borrower from whom they can repossess their collateral and cut their losses than with one who doesn’t pay and then disappears with the vehicle.
Old Debts Not Wiped Out
If a debt is paid over 30 days late ten times during a five year loan, that’s what will be reported for at least seven years on the borrower’s credit history, even if the payments are eventually caught up and the final payment is made on time. Depending on the number of trades on a credit report, though, an item may remain on the debtor’s credit even longer than that.