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How Defaulting on a Car Loan Affect Your Credit Score

Posted by Aylin Poulton - 21 May, 2013

A defaulted car loan will affect your credit rating in a negative way that can impact your ability to get financing in the future. While dealing with either an impending or already defaulted car loan, it is important to understand how it will affect your credit score and what you can do to help the situation.Defaulting on a car loan

How Your Credit is Affected

Your credit score is usually the greatest determining factor when you are applying for lines of credit and other kinds of financing. The three major credit reporting agencies use information provided by a number of sources when calculating your official credit scores. Loans weigh heavily in these calculations, both favorably and negatively. Thankfully, negative marks on your credit report will be removed after seven years. However, it is better to avoid or counteract the effect of a defaulted loan before it falls off of the report.

After missing a certain number of monthly car loan payments a lender will report the building debt to credit reporting agencies as a defaulted loan. The exact number of payments or debt total you can reach before the loan is considered in default varies and will be specified in the financing agreement you sign. The defaulted loan will lower your credit score until it is removed from the report seven years later. A low credit score can prevent you from getting approval on future financing applications.

Consider Deferment

Loan deferment is the process of negotiating a grace period with a lender during which you don’t need to make the usual required payments. If you find yourself temporarily unable to keep up with monthly car loan payments it is better to enter into a deferment period with the financing company than chancing a defaulted loan appearing on our credit report. There are usually fees and interest added to the loan principal that you will need to pay after the deferment period but your credit score will remain intact. A record of the deferment will be reported on your credit, but this is seen as a responsible choice versus the perceived irresponsibility of a defaulted loan. Once your financial situation has stabilized, you can resume paying off your car loan without doing any serious damage to your credit report.

Defaulting on a car loan will make it difficult, or impossible, to gain approval on future attempts at financing and other lines of credit. An attempt at deferment can prevent this long-lasting negative affect on your credit score.

*Image courtesy of freedigitalphotos.net

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