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Auto Loan Delinquency vs. Default and How They Affect Your Credit Score
Understanding the difference between auto loan default and delinquency can get you out of a jam or at least help with damage control. There is a huge difference between being delinquent on a loan and being in default; getting the terms straight is the first step to negotiating with a lender to stop some very negative financial situations.
What Is Auto Loan Delinquency?
Essentially, delinquency on an auto loan is simply being late with payments. How delinquent a borrower is represents how long their total past due amount has been unpaid. In other words, a customer who has previously paid on his or her loan, but who has left one payment unpaid for 15 days past the due date is 15 days delinquent on the loan.
On average, it will take at least three late payments in a row before negative loans affect your credit score significantly. One or two late payments, is generally the average people are using as a standard, although car dealers don’t like it. When you hit the third payment late, you begin to run into trouble not only with a major dent in your FICO or credit score.
Consumer agencies, credit agencies and even media outlets track auto loan delinquency across the country to see how long the average consumer has let their car loan payments slip. Being late on an auto loan is a temporary condition, one that can often be easily fixed by making a payment.
What Is Auto Loan Default?
An auto loan default means that the loan agreement is broken and can have a significant impact on your credit score and your overall credit history. An auto loan is a type of installment credit. While a successful payment history can help boost your credit, a few late payments can make for major negative marks on your report. Some financial experts use the term “default” for any situation where the loan is delinquent. This is sometimes called a technical default
While the exact formula to calculate credit scores is not public, the three major credit bureaus, TransUnion, Experian, and Equifax, weigh several 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 percent), 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 your credit history has already taken significant damage.
Your current balances also have an impact on your credit history, comprising 30 percent, and are the second biggest factor in calculating your credit score. 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.
More about Auto Loan Default
Furthermore, the effects of defaulting on an auto loan may lower your credit score below prime (a FICO score of over 700), or worse, to 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, etc.
Defaulting 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. 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 10 days late, though this is unlikely.
In some cases, a borrower may declare bankruptcy in order to be free of a debt. Collection agencies may attempt to get the borrower to pay what they owe and bankruptcy is often a means of dealing with multiple creditors who demand money. Most financial institutions will try to work with you to get your account as current as possible before repossession, as they never make as much at auction as they will if you pay off your car
In many cases, effective damage control on the part of a borrower helps prevent a lot of these negative situations. Being vigilant about auto loan delinquency can prevent defaulting and keep you driving the vehicle you’ve invested your time and money in.
