Defaulted on a car loan? Here's what can go WRONG!

What constitutes a loan default and what happens when a borrower defaults on a car loan? Read on to find out

In the prevailing economic scenario, where economies around the world are facing problems like high inflation, unemployment and bleak job opportunities, people are finding it difficult to deal with lots of issues, mainly repaying loans. People who once had good credit and made their loan repayments on time are now under constant fear of defaulting on their loans.

Probably, a major part of an individual's monthly budget is set aside for repayment of the loan. And one would not want to default on loans borrowed from lending institutions for obvious reasons. The first and most important reason is that, it destroys the credit history and secondly, one might lose their possessions purchased from borrowed money.

Let us specifically discuss the consequences of car loan defaults?

But first, let's look into some of the important reasons that can cause car loan defaults.

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When does a default happen?

Technically, a car loan default happens when a customer repeatedly fails to make the agreed car loan payments to the bank that loaned the purchase of the car. Usually, the car loan agreement that an individual signs with any bank will have these terms and conditions clearly mentioned in the agreement.

Details about the car loan, loan repayment obligations and the possible reasons for defaulting on car loan are usually explained in the agreement. The agreement also provides for the risks involved and the possible solutions in case of a default.

Though the term 'default' has no universal definition to it and differs from case to case, 'default' generally happens if an individual is 30, 60 or 90 days late on making one or more payments. It is very important to know what one should do when one realises the fact that they might not be able to make the car loan repayment for the month and avoid being tagged as a customer at 'default.'

The problem starts when the borrower starts avoiding the lender/bank as they are unable to pay back their car loan. So the moment one finds trouble in repaying car loan, one should call up their lender/bank to cite and explain honestly the reason for the delay in payment. The lender might have heard the excuse thousand times before but being straightforward could work in customer's favour and this could then eventually bring about a mutual adjustment that would prove beneficial for both the parties.

Apart from this, there are many other options available to a car loan borrower.

Borrowers can try to talk and convince the lender/bank to extend the car loan duration. For instance, if one had originally taken a car loan for 36 months, one could request it to be extended to 48 months. This will ensure that the monthly commitment to pay the EMI is reduced.

Borrowers can also ask the lender/bank to allow making a deferred payment. It means that borrowers would be allowed to skip the current month's payment and make it at a later date. The borrower can explain the lender that giving them a month's time for the repayment can give them some flexibility to pay.

Along with it, the borrower can also convince the lender/bank to change the payment due date permanently.

Late charges are often levied on late payments. If the borrower feels that these accumulated late charges are actually straining them from making a prompt payment, they can always ask their lender/bank to waive off these fees. If it would help the borrower to make a timely payment, the lender/bank might agree to waive off the late fees.

What if none of the above options work out?

As said if the payments are not made as mentioned in the agreement, then it is deemed as default.

The apparent fallout of this is that the lender/bank might repossess the loaned car. Depending on the loan agreement, the lender/bank will send the borrower a written notice of default asking her/him to make the payment of the remaining balance on the car loan or face repossession of the car.

If the notice is not honoured within the time mentioned in it, the loaned car will be repossessed.

What do banks do with repossessed cars?

As said, a repossessed car is often sold at an auction to pay off the default loan amount. The auction details are well advertised and done in a commercial manner. Usually, the lender/bank informs the customer at default about the place and timing of the auction so that if they want to bid or just see how the auction goes they can do so.

Borrower's troubles do not end when the repossessed car is sold off at an auction. There could be other serious fallouts of the default for them. The borrower's credit record will be affected and the borrower might not be in a position to avail any new loans for the next 7 years. This might force them to get into bad credit market where interest rates are threateningly high!

The borrower might also have to face a default judgment. A default is the difference between the value of the car at the time the lender/bank sells it and the actual outstanding loan balance that the borrower owes on the car loan. For instance, if an individual owe Rs 400,000 to the lender/bank at the time of repossessing but the car only sells for Rs 3,00,000, one will have to pay the difference of Rs 100,000 to the lender/bank. If not, the lender/bank could move a court to claim it.

On the other side, if the car is sold off at a higher price than the money owed by the borrower to the lender/bank, the surplus amount is reimbursed to the borower.

Can a regular car buyer purchase a repossessed car at a discount price? How does this process work?

Repossessed cars are often sold at a discounted price for obvious reasons; mostly because it is technically not a new car and up for only a resale. As said, repossessed cars are sold at auctions which are advertised. So if the borrower is interested in buying the repossessed car then s/he can refer to these adverts or can also call auction houses or local lenders/banks that repossess cars or local used car dealers. In some cases, the borrower can buy the repossessed car online as some small lenders also resale it online.

All information regarding the repossessed car including the preferred payment mode, the correct form to be filled, etc are usually available in the adverts of the lenders/banks, auction houses or local used car dealers or at the place where the auction takes place.

It is advisable to check the repossessed car before buying it. One can take help of a car expert for this. It is also advisable to look at the vehicle's history report, if it is available. A thorough check of the car interiors for any kind of defects and, if possible, taking a test drive will go a long way in ensuring that one buys a car in good condition.