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How a car loan charge-off works

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If you have an auto loan that you’ve fallen behind on, the lender may eventually decide to charge off the loan, which means the lender assumes you’re not going to repay the debt. Having a loan charged off does not mean you’re off the hook for repayment. And it doesn’t change the original terms of your loan.  

In many cases, the lender may simply send the debt to a collection agency that will pursue repayment with you. Understand what your responsibilities are in such situations and what steps will happen before and after the charge-off occurs. 

What an auto loan charge-off is 

A charge-off is a procedure by which companies move an account, such as an auto loan, from their asset column to a liability for accounting purposes. Often lenders take this step after unsuccessfully trying to collect on a debt for an extended period. For record keeping purposes, the lender is declaring the debt uncollectible. Auto loans generally must be charged off after 120 days of nonpayment. 

When companies or lenders charge off a debt, they’re able to write it off for tax purposes. However, you still owe the money and nothing about the terms of the loan changes as a result of a lender taking this step. You are still fully responsible for repaying the debt. 

How an auto loan charge-off works 

When a lender considers an auto loan debt uncollectible, it can choose to begin the charge-off process, which includes a variety of steps with ramifications that will affect you. 

  1. The debt is shifted from asset to liability. Step one of an auto loan charge-off is simply an accounting classification. The lender shifts the loan from its assets column and officially categorizes it as a liability. At this point the loan is no longer considered income for the lender.  
  2. Notification of default. Depending on the state you live in, the lender may be required to send you a notice of default and give you a chance to repay the outstanding debt. Not every state requires this. 
  3. A third-party collection agency may take over collection. Often when a loan is charged off by the original lender, it’s sent to a third party, such as a collection agency, which takes over pursuing debt repayment. Collection efforts may even include suing you for repayment. If there’s a judgment against you, a portion of your wages may be garnished as repayment. 
  4. The charge-off is reported to credit bureaus. Once a debt is charged off by a lender, your credit score also takes a hit. This is because the charge-off is reported to all of the credit bureaus as a derogatory remark, and it typically remains on your report for up to seven years. You may see as much as a 100 point drop in your credit score and can have trouble securing a car loan in the future. 
  5. Vehicle repossession. In cases of secured auto loans, when the debt is secured by the vehicle itself, the car may ultimately be repossessed as part of the charge-off process. 

You may be able to drive a charged-off car 

A car loan is typically secured using the vehicle bought with the loan. If you don’t make payments, the lender can repossess and sell the vehicle in order to recoup the outstanding money owed. 

However, even when an auto loan is charged off by a lender, you may be able to continue driving the car — at least for a little while. Depending on where you live, a lender is required to issue a default notice and allow you the opportunity to bring the loan current before repossession. In such cases you can avoid repossession if you pay off the debt or make satisfactory payment arrangements. However, not all states have this requirement.  

If you used an unsecured loan to buy the vehicle, then the loan is not backed by the car and cannot be repossessed by the lender. In such cases, the lender would need to go to court and win a judgment against you in order to have access to your possessions. 

What to do if your car loan has been charged off 

When your car loan has been charged off there are several steps you can take. If the account has not yet been turned over to a collection agency, you might reach out to the lender directly and ask if you can pay a flat amount to completely clear up the debt. You might also try to negotiate loan terms that are more manageable for you.  

You could also look into the statute of limitations for your state surrounding debt collection efforts to learn how much longer the lender or a collection agency can continue to try and collect from you. Depending on where you live, the statute of limitations can be anywhere from three to 10 years from the date of default.  

Keep in mind that the charge-off will remain on your credit report for seven years and affect your ability to get any more car loans. Loan charge-offs will also affect any future interest rates you are offered, so it may be best to try to resolve the debt directly. 

The bottom line  

When a car loan is charged off, you’re still responsible for repaying the debt. Once a lender has charged off an auto loan, it often means you will have to deal with a third-party collection agency — and worse, your car can be repossessed, or you could be sued for repayment. Charged-off accounts also damage your credit report.  

If you are behind on auto loan payments, try reaching out to the lender or even the collection agency to negotiate manageable repayment terms. If you’re being sued for repayment, you should likely contact an attorney. 


Written by
Mia Taylor
Contributing Writer
Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation's leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and
Edited by
Auto loans editor