What Is a Charge-Off on a Car Loan?

What Is a Car Loan Charge-Off?

A lender will typically charge off a loan after trying and failing to collect an unpaid debt. Before that happens, every missed payment will be reported to the credit reporting agencies, and that will negatively impact your credit score. The account will likely be labeled as delinquent once it's 30 days past due.

After four to six months of nonpayment, the account may be marked as charged off on your credit reports. This is another derogatory event that will stay on your credit reports for seven years.

Learn more: How to Get Out of a Car Loan You Can't Afford

How Does a Charge-Off Work?

By charging off an auto loan, the lender is choosing to write off the balance as a loss—but that doesn't mean your debt is forgiven. You'll still be legally responsible for paying your balance. Below is a breakdown of the charge-off process.

1. The Debt Moves From Asset to Liability

If your auto loan is in good standing, the lender considers it an asset because they expect you to continue making payments, which includes interest. But if you default on your loan, they'll consider your debt a liability. In other words, they don't believe that you'll repay your balance and have agreed to report it as a loss on their books.

2. The Charge-Off Is Reported to Credit Bureaus

A car loan charge-off is typically reported to the credit bureaus if the account goes unpaid for 120 to 180 days. The loan will appear as charged off on your credit reports—and will remain there for seven years. That could deter lenders from working with you during this time.

3. Collection Agencies May Be Notified

At this point, the lender may sell the account to a collection agency. Your original car loan may be marked as closed or transferred on your credit reports, and a new collection account may appear—which will likely damage your credit health even further.

Collection agencies are third-party companies that will continue to pursue payment from you, and they have a reputation for being relentless. If you fail to repay the debt, they may take legal action, which could result in wage garnishment or a lien against your property.

Tip: Once the loan is charged off and sent to collections, you'll need to contact the collection agency, not the original lender, for next steps.

What Happens After Your Car Loan Is Charged Off?

A charge-off can spell major trouble for your credit health. You could also end up losing your car. Here's what may happen after an auto loan is charged off.

• Damage to your credit score: Your credit score will likely take a big hit during the time that passes between your first missed payment and the account being charged off. That's because your payment history makes up 35% of your FICO^® Score^☉, the score used by 90% of top lenders. That could make it harder to get approved for loans and credit cards in the future.
• Repossession: Once you're 90 days past due on your auto loan, the lender will likely seize your vehicle. Repossession can happen at any time, causing emotional distress and leaving you without transportation.

Learn more: Can I Get a Car Loan After a Repossession?

Can You Drive a Charged-Off Car?

It depends on whether you have a secured or unsecured car loan. Auto loans are generally secured, meaning that the car serves as collateral. If you default on your payments, the lender has the right to repossess your car. They will likely sell the vehicle and put the proceeds toward your outstanding loan balance. You'll be responsible for paying any debt that's still left over, which is known as a deficiency balance.

If you used an unsecured personal loan to buy a car, it will be safe from repossession. But if a personal loan is charged off, the lender can still sue you to recoup their losses.

What to Do if Your Car Loan Is Charged Off

You'll want to act quickly to avoid further damage to your credit. Below are some potential action items:

• Contact your lender about reinstatement. The sooner you reach out to your lender, the better. If they haven't already sent the account to collections, they may be willing to reinstate the loan. You'll need to pay any past-due amount as well as any fees, but this could be a good way to get back on track with the loan and avoid repossession. The lender may even be willing to modify or defer your payments if you're experiencing financial hardship.
• Voluntarily surrender the car. You might opt for voluntary surrender, which is when you initiate returning the car to the lender to avoid repossession. The event will likely be reported to the credit bureaus but will do less damage than an involuntary repossession.
• Consider settling the debt.You might try to negotiate a settlement with the collection agency. The company might be willing to accept a reduced amount over nothing.
• Explore bankruptcy. This last-resort option can affect your finances in a big way, but it may be your last hope if you're overwhelmed by debt that goes beyond just your car loan. The details of your bankruptcy, the state you live in and the value of your car will determine if you'll be able to keep your car.

Learn more: How Does an Auto Loan Hardship Program Work?

Frequently Asked Questions

The Bottom Line

An auto loan charge-off is a serious event that can impact your credit for years. You also run the risk of losing your car to repossession. While you can't undo a charge-off, you can take steps to set things right and prevent further damage. That includes rebuilding your credit. To that end, you can access your FICO^® Score and credit report for free with Experian.