No one wants to consider pay a car loan, but if you find yourself unable to make payment for your car, this might be the best option for you. Settling an auto loan involves working with the auto dealership as the liaison between you and the lender. They can often negotiate a lower lump sum payment than the full car loan if you pay by a certain date.
Your car loan settlement 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 an auto loan, the immediate impact on your credit score is negative. Your credit score will go down when you settle a car loan, but the amount of the credit score varies depending on the situation. In general, the higher your score initially, the lower it will drop if you repay your loan.
However, paying off your car loan might be the best option for you in the long run. Your credit score will be negatively affected each time you miss a payment. If you’re having trouble making regular payments and can’t fully repay the car loanpaying off your car loan will allow you to start rebuilding your credit.
Once the loan is settled, your credit score will initially decrease, but then you can focus on restoring it. You can work to make other payments on time, pay off other debts, and boost your credit score again. Opening new lines of credit could negatively affect your credit, you may want to avoid new accounts until your credit score is in better shape.
Car Debt Settlement vs Repossession
Your car loan settlement is different from vehicle recovery. With an auto loan settlement, you enter into an agreement with the lender to pay off some of your original debt. Your debt is then considered settled. However, you will have to pay taxes on any amount of forgiven debt.
With repossession, the lender will repossess 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 you owe, you may still owe the lender money. This is called a compensatory payment. You can either return your car and allow the lender to take it back voluntarilyor he may have the right to repossess your vehicle without your consent if you fail to repay your loan.
Car debt settlement and repossession will negatively impact your credit score. And, since both are often preceded by late payments, you may have several negative marks in your credit history.
Paying off your debt in full is always the best option for your credit, but that’s often too much to ask. If you can’t, try working with your lender to find the best solution. You may want talk to a credit counselor to determine what would be best for your situation.
6 alternatives to settling your car loan
- Repay the loan in full. Paying off your debt in full is always the best option for your credit.
- Modify your car loan. Depending on your situation, you may be able to change your car loan. Talk to your lender to see if they can help you rework the terms of your loan.
- Trade in your car. If your car loan is too expensive, consider trade in your car for an older vehicle. This could allow you to get a lower monthly payment for your car loan.
- Sell your vehicle. If you can get around without a vehicle, even temporarily, consider sell your car.
- Allow your car to be repossessed. Vehicle repossession comes with its own set of negative marks for your credit, but it might be better than settling your car debt. Talk to a credit counselor to learn about the best options for your credit.
- File the balance sheet. If paying for your car isn’t your only financial concern, you could file the balance sheet. 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 a daunting process, but improving your situation now will improve your finances in the long run. Consider all of your alternatives before deciding to settle your car loan, as it will negatively affect your credit score for seven years. If you’re unsure what to do, consider talking to a credit counselor.