Buying a car for the first time is a major milestone. Before you take that step, be sure you can afford to make the monthly payments. Missing payments at any time can expose you and your credit score to adverse consequences, but if you don't make the first payment on time, the repercussions can be especially harsh.
Depending on who finances your automobile, the lender could accelerate your contract's term and repossess your vehicle the day after you miss the first payment ... without any advance warning to you.
Auto Loan Default
Under normal circumstances, an auto loan payment is typically considered delinquent after 30 days. The loan is considered in default after going 90 days without a payment, although this can vary depending on your loan agreement. However, this time frame generally applies to people who already have some payments under their belt and have established a history of paying on time.
First Payment Rule
Sometimes auto loan contracts incorporate a first payment default rule. This accelerates the usual default time frame, allowing the lender to consider your loan in default as soon as you miss the first payment. The lender then has the right to take action and pursue collections immediately. This helps to protect auto lenders from fraud and from borrowers who overestimate or overstate their ability to make their monthly payments.
Options If You Can’t Pay
If you know you can't make your first loan payment on time, there are a few things you can do to head off default and repossession. The first step is to let your lender know. If you can make your payment in the future, the lender might agree to modify the loan contract and either move the payment due date, allow reduced payments or even allow a short deferment on payments. This means you would skip a payment and add it onto the back of the loan, which would increase the amount of interest you have to pay.
Consequences of Defaulting
Once an auto loan is in default, the lender has the right to take the car back, which is called repossession. Any costs incurred by the lender that aren’t covered by repossessing and reselling the car can be turned over to a collection agency. Each of these things will negatively impact your credit report. If you know you can’t afford to make your payments, consider voluntarily returning the car. The default will still appear on your credit report, but it won’t look as bad as it would if the car is repossessed.
- Federal Trade Commission: Vehicle Repossession
- National Automobile Dealers Association: Understanding Vehicle Financing
- Federal Trade Commission. "Making Payments to Your Mortgage Servicer." Accessed July 13, 2020.
- Federal Student Aid. "Student Loan Delinquency and Default." Accessed July 13, 2020.
- Experian. "What Happens If I Default on a Loan?" Accessed July 13, 2020.
- Experian. "What Happens If I Stop Paying My Credit Cards?" Accessed July 13, 2020.
- Federal Trade Commission. "Trouble Paying Your Mortgage?" Accessed July 13, 2020.
- Consumer Financial Protection Bureau. "Learn About Mortgage Relief Options and Protections." Accessed July 13, 2020.
- Federal Student Aid. "Coronavirus and Forbearance Info for Students, Borrowers, and Parents." Accessed July 13, 2020.
- Federal Student Aid. "Getting Out of Default." Accessed July 13, 2020.
Jean Marie Bauhaus has been writing about a wide range of topics since 2000. Her articles have appeared on a number of popular websites, and she is also the author of two urban fantasy novels. She has a Bachelor of Science in social science from Rogers State University.