December 8, 2023

Car Auto Finance

Car Auto Finance FOR Everyone

How Settling A Car Loan Affects Credit

Nobody wants to consider settling a car loan, but if you find yourself unable to make your car payment it could be the best option for you. Settling a car loan involves working with the car dealer as a liaison between you and the lender. They can often negotiate a lump sum payment that is less than the full car loan if you pay by a certain date. 

Settling your car loan will affect your credit score. However, it is important to weigh the pros and cons for your long-term credit history and financial goals when deciding what to do.  

Settling a car loan will lower your credit score 

When you settle a car loan, the immediate impact on your credit score is negative. Your credit score will go down when you settle an auto loan, but the amount the credit score goes down varies by situation. In general, the higher your score is at the start, the more it will go down if you settle your loan.  

However, settling your car loan could be the best option for you in the long term. Your credit score will be negatively affected every time you miss a payment. If you are struggling to make regular payments and can’t pay off the auto loan completely, settling your auto loan will allow you to start rebuilding your credit.  

Once the loan is settled your credit score will initially go down, but you can then focus on building it back up. You can work to make other payments on time, pay down other debts and raise your credit score again. Opening new lines of credit could negatively affect your credit, so you may want to avoid new accounts until your credit score is in better shape. 

Car debt settlement vs. repossession 

Settling your car loan is different from vehicle repossession. With an auto loan settlement, you make an agreement with the lender to pay a portion of your original debt. Your debt is then considered settled. However, you will have to pay taxes on any amount of a debt that is forgiven.  

With repossession, the lender will take back your car and sell it to pay off some or all of your loan debt. If the car is sold for less than the amount of your debt, you may still owe money to the lender. This is called a deficiency payment. You can either turn in your car and allow the lender to repossess it voluntarily, or it may have the right to repossess your vehicle without your consent if you fail to make your loan payments.  

Both car debt settlement and repossession will impact your credit score for the worse. And, since both are often preceded by late payments, you may have multiple negative marks in your credit history.  

The best option for your credit is always to pay off your debt in full, but that’s often too tall of an ask. If you can’t do that, try to work with your lender to find the best solution. You may want to talk to a credit counselor to determine what would be best for your situation.  

6 alternatives to settling your car loan 

  1. Pay off the loan completely. Paying off your debt in full is always the best option for your credit.  
  2. Modify your car loan. Depending on your situation, you may be able to modify your car loan. Talk to your lender to find out if it can help rework the terms of your loan. 
  3. Trade in your car. If your car loan is too expensive, consider trading in your car for an older vehicle. This could get you a lower monthly payment for your vehicle loan.  
  4. Sell your vehicle. If you can get around without a vehicle, even temporarily, you may want to think about selling your car 
  5. Allow your car to be repossessed. Vehicle repossession comes with its own set of negative marks for your credit, but it could be better than settling your car debt. Talk to a credit counselor to find out the best options for your credit. 
  6. File for bankruptcy. If your car payment isn’t your only financial issue, you could file for bankruptcy. This will affect your credit for up to ten years, so it’s not something you want to do if you have other options.   

The bottom line 

Settling a car loan can be an intimidating process but improving your situation now will make your finances better in the long run. Consider all of your alternatives before deciding to settle your car loan, as it will affect your credit score negatively for seven years. If you aren’t sure what to do, consider talking with a credit counselor.  

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