An auto loan default can have a significant impact on your credit score and your overall credit history. An auto loan is a type of installment credit. And while a successful payment history can help boost your credit history, even a few late payments — let alone a default or repossession — can make for a major negative mark on your credit report.
While the exact formula used to calculate a credit score is not public information, the three major credit bureaus: TransUnion, Experian, and Equifax weigh several different items that can help a lender determine the perceived risk related to extending you a loan. Your personal payment history makes up the single largest component of your credit score (35%), so missing payments to the point of default could result in your credit score falling by over 100 points. If your account goes into collection or your vehicle is repossessed, your score will fall even more, as the balances and late fees on your account rise. Reaffirming on a repossessed vehicle will allow you to get your vehicle back, but by this point the damage has already been done to your credit history.
Your current balances also have an impact on your credit history, and are the second biggest factor in calculating your credit score, making up 30% of it. If your loan goes into default, your balance will not go down, and depending on your lender’s collection practices, your balance may actually go up, further hampering your score. Again, while bringing your account current will help in the long term by staving off repossession, by the time an auto loan is delinquent for a few months, the damage has already been done.
The effects of defaulting on an auto loan, which can lower your credit score by over 100 points, may lower your credit score below prime (a FICO score of over 700), or may even lower your credit score to a subprime level (often viewed as below a FICO score of 550). Therefore, your auto loan default will make it more difficult to receive other types of revolving and installment credit, such as mortgages, credit cards, home equity loans, and the like. Some landlords even consider credit scores, and are apprehensive about leasing to individuals with credit scores under 600.
An auto loan default will also make it difficult to secure financing for another new or pre-owned vehicle. The lender with whom you defaulted will not be likely to extend further credit, and today’s stricter underwriting guidelines mean that it will be very difficult to obtain financing without a significant down payment. Your auto loan default could also leave you without a vehicle altogether if it is repossessed. While many lenders will wait until an account is over six months delinquent, your finance contact may state that repossession could occur when the bill is just ten days late. Although this is unlikely, it is always a possibility.
While the effect of an auto loan default on your credit score may be the most obvious, the relating difficulty in obtaining financing or even renting an apartment can make a few missed payments a much larger problem that will manifest itself for years to come.