When you sign a contract for a car loan, you are responsible for paying back what you borrow. The bank can repossess your vehicle if you stop making your payments before meeting the financial obligation of the loan.
Unfortunately, repossession alone may not clear your debt, and you may still owe the bank money.
How vehicle repossession affects your loan balance
When the bank takes back your vehicle, they usually sell it to recover their money. Sometimes the sale amount does not cover the remaining loan debt or the added repossession fees and penalties. If this occurs, you should receive a Deficiency Notice detailing the amount of debt you still owe the bank. Even though you no longer have the car, you are legally responsible for the balance of the loan.
What the next steps are if you cannot pay your debt
If you cannot afford to make payment arrangements with your loan holder or pay the deficiency balance in full, the lender can attempt to collect the debt through legal strategies. You may initially receive phone calls or letters from debt collectors.
When that proves unsuccessful, the bank or debt collector can file a lawsuit to collect the debt. At that point, a judge may approve a judgment against you. The ruling allows the bank or credit agency to collect the debt through wage garnishments, liens and bank account garnishments.
Understanding the consequences of loan default may encourage owners to make alternate financial arrangements if they struggle to make the monthly payment on their auto loan.