If you are more than 90 days late on your car payment, you are considered “seriously delinquent,” which can have very serious consequences, and can even lead to repossession. In this article, we’re going to explain what you need to know about a late car payment and how to deal with it if it happens.
- 1 What exactly is delinquency?
- 2 Is it the same as the default?
- 3 Trends in Auto Loan Delinquencies
- 4 Why are backlogs getting worse?
- 5 How can I avoid falling into arrears or default?
- 6 1. You have to know how much you owe and how much you can pay
- 7 2. Understand your options
- 8 3. Call your lender
What exactly is delinquency?
As usual, delinquency is used to describe a situation in which a borrower misses the due date of a single scheduled payment for a form of financingsuch as student loans, mortgages, credit card balances or auto loans, as well as unsecured personal loans.
The consequences of default are varied, depending on the type of loan, the duration and the cause of the default.
For example, suppose a recent college graduate misses a student loan payment in two days. The loan from him remains in delinquent status until you pay off, defer, or cancel your loan.
Is it the same as the default?
The default, that is, not pay a loan, and being delinquent do not carry the same weight in terms of consequences. When you are in default, it simply means that you have not made your monthly payment on time.
Generally, you have 30 days from the due date before serious actions occur, but that does not mean that you are free of consequences, since when you make the corresponding payment, you will have to face a late payment fee.
And if you don’t get up to date with the car payment, you run the risk of going into default. Once this happens, the lender can repossess the vehicle without prior notice.
In addition to negative marks on your credit report for being delinquent, having information about a repossession as a result of defaulting on your car loan, further lower your credit score.
Trends in Auto Loan Delinquencies
In recent years, subprime borrowers have increasingly struggled to meet their financial obligations, resulting in auto loan delinquencies on the rise.
In this vein, in the second quarter of 2019, 4.64% of auto loan balances were 90 days or more past due, the second highest percentage since 2011, according to a report from the Federal Reserve Bank of New York. On the other hand, during that period 2.34% went into default, without a doubt one of the worst rates since 2010.
Despite the strength of the economy, more borrowers with credit scores below 620, that is, those considered a riskier bet, are or have entered serious delinquency. In the fourth quarter of 2018, 8.18% of their auto loan balances were more than 90 days past due, this being the highest level since 2010.
Why are backlogs getting worse?
Default rates in general have definitely been worse, down to 5.27% in 2010, when the country was beginning to emerge from the Great Recession. But researchers at the Federal Reserve say they have been seeing a major deterioration in recent years.
One explanation may simply be that more people are taking out auto loans than ever before, so there are now more subprime borrowers than ever before, and this type of borrower is at greater risk of being left behind.
“The substantial and growing number of distressed borrowers suggests that not all Americans have benefited from the strong job market and warrants continued surveillance and analysis of this sector,” the researchers wrote in a February 2019 report.
Not surprisingly, it is younger Americans, who may have lower wages and a lot of student loan debt, who face these financial problems the most. In fact, the highest default rates are found among borrowers ages 18 to 29, followed by those ages 30 to 39.
How can I avoid falling into arrears or default?
If you’ve fallen behind on your car payment, don’t panic, but act fast. Two or three consecutive late payments can lead to repossession, seriously hurting your credit score. Some lenders have even adopted technology that allows cars to be remotely disabled after one late payment.
Now, you have options to deal with this situation, and your lender will most likely be willing to work with you to find a solution. Whether you’ve forgotten to make the payment or can’t pay the full amount, having a clear and honest conversation with the lender is key to limiting the damage.
1. You have to know how much you owe and how much you can pay
If you just missed the payment but can cover it, great. Follow step 2 of this list. But if you’re having a hard time raising enough money, you need to do a little research.
Know the details of your loan. Make sure you understand your loan balance, interest rate, and term (how long the loan is for). Check if there are any late payment or non-payment charges.
Know what you can afford. Review your budget to see if you can cut any expenses so you can put more toward your loan payment. (If you don’t have a budget, start at least one simple one as soon as possible). We also recommend that you try to put together some extra money.
Once you’ve identified how much you can afford this month, take an honest look at your overall situation. Think about whether this is a difficult month or if the car payment is an ongoing problem. In general, try to keep car expenses, including loan payments, insurance, gas, and maintenance, to no more than 20% of your take-home pay.
2. Understand your options
How you proceed depends on whether the default is a one-time problem or a sign that the loan is unaffordable.
If you can afford to pay
For a payment you just forgot to make, call the lender and let them know you’ll pay as soon as you can. As we mentioned before, you may have to pay a late fee for missing the due date. In the future, you may want to consider setting automatic payments to prevent this situation from happening again.
And if you don’t have the money to take on the payment…
A single late payment. Loan deferment is a common solution for an isolated late payment. The missed payment is pushed to the end of the loan term, and you’ll usually only have to pay the interest due this month. Some lenders may also waive late fees. In general, lenders are more forgiving when you have taken the initiative to communicate and have made an effort to resolve the problem.
Constant problem. If you can’t afford the car payment because the loan is unaffordable, you’ll have to deal with this month’s problem first by seeking a deferment. This will stop the immediate threat of a credit score drop due to a late payment, or repossession. So you immediately look for long-term solutions, such as refinancing or the change of the car for a more affordable one.
3. Call your lender
Once you know what you can afford and your options, it’s time to pick up the phone. Explain your situation and ask your lender about possible solutions, such as deferment. Remember that you are asking for help, so be courteous rather than defensive or angry.
Vince Shorb, CEO of the National Council of Financial Educators, has some advice: Know your story. Explaining the context of your late payment, and what you will do to resolve it, may make lenders more inclined to give you a break.
“If you have a good story and see that light at the end of the tunnel, the lender may be more willing to work with you than someone who is in a downward spiral,” says Shorb. “If they feel confident that you will be able to repay the loan, they will feel more comfortable working with you.”
You may have to prove your story. For example, if you can’t pay this month because you recently lost your job, but you have a new one starting soon, your lender may ask for documents to prove your situation.
Now, before you sign any loan adjustment, such as a deferment, make sure you fully understand the terms and that you have or will get a written copy for future reference.
The good news is that your lender wants you to be successful in repaying your loan instead of spending their money and time repossessing the car. In addition, following these steps can be of great help to you to evaluate, understand and communicate your financial situation.