How Car Loan Charges Work and How to Avoid Recovery

If you have a car loan that you have left behind, the lender may eventually decide to repay the loan, which means that the lender assumes that you are not going to repay the debt. Repaying a loan does not mean that you are not ready to repay it. And it does not change the original terms of your loan.

In many cases, the lender can simply send the debt to a collection company that will seek to repay it with you. Understand what your responsibilities are in such situations and what steps will be taken before and after the charge is made.

What is a car loan charge?

Billing is a process by which companies move an account, such as an auto loan, from their assets column to a liability account. Lenders often take this step after trying unsuccessfully to repay a debt for a long time. For record keeping, the lender declares the debt non-collection. Car loans generally have to be repaid after 120 days of non-payment.

When companies or lenders pay off a debt, they can write it off for tax purposes. However, you still owe the money and nothing about the terms of the loan changes as a result of a lender taking this step. You are still fully responsible for repaying the debt.

How a car loan repayment works

When a lender finds that a car loan debt is not repayable, it may choose to start the repayment process, which involves a variety of steps with consequences that will affect you.

  1. Debt shifts from assets to liabilities. The first step in repaying a car loan is simply an accounting classification. The lender shifts the loan from its asset column and formally categorizes it as a liability. At this point the loan is no longer considered income for the lender.
  2. Default notification. Depending on the state in which you live, the lender may need to send you a notice of default and give you the opportunity to repay the outstanding debt. Not every state requires it.
  3. A third party collection company can take over the collection. Often, when a loan is debited by the original lender, it is sent to a third party, such as a collection company, which undertakes to repay the debt. Collection efforts may even include a repayment lawsuit. If a court order is issued against you, part of your salary can be decorated as repayment.
  4. The charge refers to the credit bureaus. Once a debt is owed by a lender, your credit score is also hit. This is because repayment is reported to all credit bureaus as a derogatory note and usually stays on your report for up to seven years. You may see a drop of up to 100 points in your credit score and you may have trouble securing a car loan in the future.
  5. Vehicle recovery. In the case of secured car loans, when the debt is secured by the vehicle itself, the car can eventually be recovered as part of the billing process.

You may be able to drive a charged car

A car loan is usually secured using the vehicle purchased with the loan. If you do not make payments, the lender can recover and sell the vehicle to recover the money owed.

However, even when a car loan is charged by a lender, you may still be able to keep driving – at least for a while. Depending on where you live, the lender should issue a notice of default and give you the opportunity to return the loan to its current state before recovery. In such cases, you can avoid recovery if you repay the debt or make satisfactory payment arrangements. However, not all states have this requirement.

If you used an unsecured loan to buy the vehicle, then the loan is not backed by the car and can not be repaid by the lender. In such cases, the lender will have to go to court and win a court decision against you to have access to your belongings.

What to do if your car loan has been repaid

Once your car loan has been repaid, there are many steps you can take. If the account has not yet been delivered to a collection company, you can contact the lender directly and ask if you can pay a lump sum for full debt settlement. You can also try to negotiate loan terms that are more manageable for you.

You could also look at the statute of limitations for your state surrounding debt collection efforts to find out how much longer a lender or collection company can continue to try to collect from you. Depending on your place of residence, the limitation period can be anywhere from three to 10 years from the date of default.

Keep in mind that the charge will remain in your credit report for seven years and will affect your ability to get more car loans. Loan charges will also affect any future interest rates offered to you, so it may be best to try to settle the debt directly.

The bottom line

When a car loan is repaid, you are still responsible for repaying the debt. Once a lender repays a car loan, it often means that you will have to consult with a third party collection company – and worse, your car can be recovered or sued for repayment. Debit accounts also damage your credit report.

If you are delaying car loan payments, try contacting the lender or even the collection service to negotiate manageable repayment terms. If you are being sued for repayment, you will probably need to contact a solicitor.

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