What happens when you miss a car loan payment?

While it’s not ideal, there may come a time when you miss a car loan repayment, maybe due to unexpected situations or due to a financial hardship.

It’s not something to be taken lightly, as it may end up being reflected as a record on your credit report. When applying for a credit card, home loan and other personal loans, lenders will refer to the historical accounting of your past borrowing and financial information. After all, past behaviour can be an indicator of future behaviour, and lenders want to take steps to help ensure they’ll get the money back that they lent you.

First things first – a car loan is a personal loan for a car. You’re required to repay the principal and interest over a fixed term, which is decided at the time of the loan. This is often over three to seven years.

When a bank or lender are considering a decision on your car loan and your fitness to repay it, one of the things they'll consider is your current credit rating. If it's not in great shape, you may pay a higher interest rate or may not be able to borrow as much or for as long as someone with a more satisfactory rating. Many Aussies have never checked their credit score, and may enter into the loan process blindly. You can usually check your credit score online, and are entitled to a copy of your credit report once every three months for free.

Let’s talk secured car loans. This is simply a loan that is backed by the collateral of your car. Unsecured car loans on the other hand, don’t require your car as security but the interest rates may be higher and you may not be able to borrow as much. These types of loans may be offered for cars with a lower value and are granted primarily based on creditworthiness and income. High creditworthiness could make an unsecured loan more accessible. This type of loan typically carries less risk for the borrower and more risk for the lender.

A late payment is generally a payment which is made between 14 and 60 days after their due date. When you miss a loan repayment you are breaching the terms of the loan agreement which both you and the lender agreed to. In the case of a secured loan, in the worst case scenario a lender may look to repossess your car, the asset that guaranteed the loan. They can also report a missed payment which could negatively affect your credit rating and make borrowing for future personal loans, home loans or even obtaining a credit card much more difficult.

In terms of repossession, there are very specific circumstances under which a lender can and cannot take back your car. Importantly, looking to seize a vehicle due to a missed payment is likely to be an escalation after a number of steps have been taken.

Your car won’t be seized immediately though. National Debt Solutions advises that if your car is security for your loan, “a default notice must be sent giving you at least 30 days to pay your arrears” (the amount by which you are behind in your scheduled repayments). This provides you with another opportunity to catch back up on your loan repayments.

However, to try to avoid this scenario, you should contact your lender as soon as you know you’ll miss a payment, or believe you’ll miss a payment, to understand the next steps clearly. In some circumstances, borrowers can negotiate a repayment arrangement when you explain you’re in financial hardship.

Late fees are penalties for not being on time with loan payments. Some lenders may offer a grace period though and it’s important to check the terms of your agreement with the lender to understand how late payment fees work for your loan.

There could be other consequences aside from late payment fees that you should also be aware of. If you’re late with your loan payment, some of the impacts could include:

• a mark on your credit report which could impact your credit score
• a more difficult time qualifying loans and credit cards, which could impact the interest rates you pay on future loans
• possible repossession of your car.

Under normal circumstances, over the course of a loan, your payments will generally reduce the loan amount as you pay it off. However, if you make a late payment, you are missing an opportunity to reduce the principal of the loan, which could result in paying more interest over the life of the loan.

Depending on your circumstances, and the contractual obligations you agreed to when financing your car loan, there could be some adverse effects to missing payments.

Equifax, one of Australia’s largest credit reporting agencies, advises that late payments are payments that are between 14 and 60 days late and have a varying impact on your credit score. However a default, which is where a payment is more than $150 and is outstanding for more than 60 days, can have a serious influence on your credit score.

Lenders check your financial history when making decisions about loans, qualifying for credit cards and assigning interest rates. A poor credit history may not necessarily stop you from securing a loan, but it may make it more expensive or more difficult to do so.

No one plans to have money trouble. Fortunately, there a few places consumers can go to get help. The Australian Financial Security Authority advises contacting a financial counsellor.

Financial counselors can assist you by:

• helping you work out what you can realistically afford to pay
• helping you negotiate payment terms and conditions
• assisting you in understanding how to prioritise your debts and focus on the most important
• explaining your rights to you in clear terms
• helping you apply for hardship forbearance with your creditor
• connecting you with support services through the community, government or even private options
• assist you in applying for government benefits or emergency assistance.

When you contact a free financial counsellor, like those at not-for-profit organisations, you can expect confidential, impartial advice from non-judgmental and respectful individuals who are qualified to offer guidance. In most cases you’ll be transferred to the service in your state.

You can also get free legal advice at many legal centres and Legal Aid agencies in every state and territory.