Auto loans are quite common nowadays and it’s undeniably the best option when you want to own a vehicle but can’t afford to pay the full price at once. Millions of people out there have taken up auto loans but unfortunately, most of them aren’t able to pay off their loan due to financial hardships. In such a situation, you might wonder, “is it possible to settle a car loan?”. Well, yes, it is but it’s a little complicated so before you get into the settlement process, it’s important that you weigh the advantages and disadvantages. A car loan settlement can take a dig at your credit score and it’ll stay on your report for 7 years. If this is the kind of loss you can bear then settlement is definitely worth a try!
What Is Auto Loan Debt Settlement?
An auto loan debt settlement is a negotiation between you and your creditor. What happens here is that you put up a lump sum offer in front of your lender and get the rest of the outstanding balance waived off. This usually happens when the borrower is far behind on his payments and the lender is trying to recover as much of his money as he can. Car loan settlement can help you protect yourself from repossession or any legal action. After your creditor agrees on settling your loan and you pay the lump sum amount, your account will then be reported as “settled” on your credit report.
When Is Car Loan Settlement The Right Option?
Car debt settlement isn’t for everyone. It’s not an option unless you are really facing financial hardship that’s making it difficult for you to make your monthly repayments. In a nutshell, auto loan debt settlement should be your last resort. Here are some scenarios where settlement is a possibility;
- You are far behind your payments (more than 90 days)
- The vehicle has already been taken into possession and sold off at auction (but there’s still some due amount left)
- You are facing an extreme financial hardship (divorce, loss of income or some medical emergency)
- The value of the car is less than the remaining balance which is making it hard to refinance or sell.
The reason why auto loan settlement is a little tricky is because the lender will usually only agree on settling your loan if he believes that he’ll recover less by reselling or repossessing the car than what he can get in a partial settlement. In simpler words, to make sure your settlement goes through, you have to come up with a realistic offer that your creditor can easily accept.
Guide To Settling An Auto Loan Debt
Here’s a step by step guide for you to negotiate your auto loan seamlessly and efficiently;
1-Evaluate Your Situation
Evaluating your financial situation is the first step of the process. There are three important things you need to know first, including; your car’s market value, how much you owe to your creditor and your current financial capacity to pay the lump sum. You should only go for a settlement when you really can’t afford to make your monthly repayments. A settlement can damage your credit which is why it should never be your first option.
2-Approach Your Lender
You’ll never know if you never ask. The next step of course is to contact your lender or his collections department. Explain to them your situation in detail along with your realistic offer. Ask them if they are willing to negotiate a settlement. If yes, start between 20% to 30% lump sum of the total amount you owe. Be prepared for a counter offer because lenders usually don’t accept the initial offer. After some negotiation, you and your lender both can agree on a certain percentage that benefits you both.
3-Get The Agreement In Writing
After the lender accepts your terms, ensure that you get them all in writing. It includes everything from the total amount you owe, the due date of the payment, the lump sum decided and how the settlement will be reported to the bureau. Documentation is critical if you want to avoid any future complications or legal actions.
4-Make The Payment
You have to then follow through the payment terms as per the agreement. You can’t neglect the payment terms or else you can end up into a bigger and deeper debt. Once you’ve made the payment, keep a proof of it along with the settlement agreements.
Things to Consider Before Settling Your Car Loan
Before you make the big decision of settling your car loan, here are a few important considerations to make;
1-Impact On Your Credit Score
Opting for an auto finance settlement will have a negative impact on your credit score. It’ll damage the score and the “Settled” account stays on your credit report for 7 years. A poor credit score means you’ll have fewer opportunities like securing new loans with lower interest. Moreover, your future lenders can see on your report that you were unable to clear your loan in full which is why they’ll hesitate a bit in giving you another loan. It’ll also impact your rental, housing and mortgage opportunities.
2-It’ll Help You Avoid Defaulting
Settlement is always the better option as compared to defaulting. Creditors view your settlement more favorably than defaulting on a loan. Even though the settlement will affect your credit, it’ll still save you from so much trouble in the future especially if you start taking necessary measures to build your score back right away.
3- You Should Know About The Tax Implications
When your creditor agrees on settling your debt, you might have to pay tax on the forgiven amount. According to the IRS if a lender has forgiven anything more than $600 then you as a borrower are obliged to pay them the tax on it. Most of the time people don’t know about the tax implications on auto loan debt settlement and then they are hit hard with a tax bill on the forgiven amount. So it’s important to first talk about the taxes with a financial advisor so that you have the amount prepared before time.
Auto Loan Settlement vs Repossession
To clear the air, auto loan settlement and repossession are two different things. Repossession is when you default on your auto loan, the lender can seize your vehicle and then sell it to recover the loss. You can even choose voluntary repossession of the car so the lender can sell it and recover the amount. Now, if there’s a difference between the amount the lender sells your car for and the amount of loan left that’s called deficiency balance. You have to pay off the deficiency balance or the second option is to negotiate a settlement with the lender and ask him to reduce the outstanding amount due.
The Takeaway
When you are struggling with your auto loan, you should first explore other options like modifying or refinancing the loan. This is better as it won’t have any negative impact on your credit and it’ll keep your financial future a lot more stable. However, if nothing seems to work for you then of course, debt settlement is the wiser way out. It’s just that there’s so much complication in the settlement process that it can be quite overwhelming for you to deal with the stress. It’s best that if you are opting for auto loan debt settlement then use a third party service like a debt settlement company. Mountains Debt Relief will be a great pick here because of the experience and expertise they have when it comes to debt settlement.
FAQs
Q1. Can I Settle My Car Loan Early?
Yes, fortunately you can settle your car loan early especially when it comes to your lock in period. One important thing to remember here is that you might have to pay an early settlement fee during the lock in period.
Q2.What Happens To The Car After Loan Settlement?
If your car hasn’t been repossessed and your creditor agrees on settling your loan then you might have to return the vehicle. However, if the car has been repossessed and sold and you still have some deficiency balance to deal with then you can request the lender for a settlement on the remaining amount.
Q3. Is Forgiven Car Loan Debt Considered Taxable?
Yes, if your lender has forgiven more than $600 then the amount will be considered taxable by the IRS. Your lender will most probably provide you a Form 1099-C when it’s time to pay the tax. You as a borrower have to pay the tax amount no matter what or else you could face legal consequences.