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3 minutes read. Published September 19, 2022
Written by Emma Woodward Written by Contributing writer Emma Woodward is a former contributor for Bankrate and freelance writer who loves writing to help people understand personal finance issues. She has written for businesses and publications like Finch, Toast, JBD Clothiers and The Financial Diet. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are dedicated to helping their readers feel confident to manage their finances with clear, well-researched facts that break down complicated subjects into digestible pieces. The Bankrate guarantee
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So, this compensation can influence the manner, place and in what order products are listed and categories, unless it is prohibited by law. We also offer mortgage, home equity and other home lending products. Other factors, such as our own website rules and whether the product is available in the area you reside in or is within your own personal credit score may also influence how and where products appear on this website. Although we try to offer a wide range offers, Bankrate does not include information about every financial or credit item or product. Making a decision to take out an auto loan is a tough decision to take. It affects your credit score, and can hinder your ability to obtain another loan or even open another credit line. Most people want to avoid this . However, sometimes there is no other viable alternative. The process of obtaining a car loan involves an agreement with a dealer as a liaison between the lender. They may be able to offer a lump-sum payment that is less the total amount of your car loan when you pay it by a specified date. Prior to making this choice it is important to consider what the benefits and drawbacks are for your and financial goals, and your financial situation, when deciding which option to take. Settling a car loan will lower your credit score When you pay off a car loan immediately, the impact to your credit scores is negative. Your but the amount it decreases will vary. In general, the better your score at start, the more it will go down if you settle your loan. However, settling your car loan may be the most beneficial option for the long run. Your credit score gets affected every time you miss the loan payment. If you are struggling to keep up with your payments and can’t , settling your auto loan can allow you to rebuild your credit. When the loan has been paid off, your credit score will initially go down but it is something you can then focus on . It is possible to make regular payments, pay down other debts , and improve your credit score once more. New accounts can negatively impact your credit score, therefore it is best to stay clear of opening new accounts until your credit score is in better shape. A paid-off account will stay on your credit score for seven years after the original delinquency date. This may seem like a lengthy period, but keep in mind that it is preferable to multiple unpaid payments piling up on your credit score. You’ll also pay taxes on the forgiven debt It’s worth noting that if you undergo an auto loan settlement that is less then the total amount of loan in itself, the lender usually will write off the amount that is not paid. This amount is considered to be taxable income to the IRS, which means you could be required to pay federal taxes. You should receive a 1099-C cancellation of debt tax notice from the creditor. It will tell you the amount you must pay taxes on. Because this is considered income, it is taxed according to the tax bracket of your income that you’re in. Car debt settlement vs. repossession The process of settling your car loan is different from . In an automobile loan agreement, you make an agreement with the lender for the payment of a certain percentage of the debt you incurred. Your debt will then be considered settled. But, you’ll have to pay taxes on your forgiven debt. In the event of repossession the lender will return your car and sell it in order to pay some, or even all your loan obligation. If the car is sold at a price less than the amount of the loan, you might have to pay the lender. This is known as an indeficiency settlement. You may surrender your car , and . The lender may also have the right to take possession of your car without your consent in the event that you do not make the loan payments. Both the settlement of your car debt and repossessions can impact your credit score to the detriment of. And, since late payments often precede both, you may have multiple negative marks in the history of your credit. Repossession can drop your credit score by 100 points or higher. The best way to protect your credit is always to settle your debt in full, however that’s often too tall of a request. If you can’t accomplish that, then cooperate together with the lender to come up with the best solution. It is possible find out what is best for your situation. Six options to settle your car loan Make sure you pay off the loan completely. In full is the best option for your credit. Modify your car loan. Based on your circumstances you may be in a position to . Talk to your lender to find out if it can help rework the conditions that you have to pay for the loan. You can trade in your vehicle. If your car loan is prohibitive, consider for an older vehicle. This could get you a lower monthly payment for your vehicle loan. Sell your vehicle. If you are able to travel without a vehicle, even temporarily, you may want to think about . Allow your car to be taken over. The repossession of your car can also affect your credit score, however it’s a better option than settling your car debt. Contact a credit counselor to find out the most effective alternatives to improve your credit. File for bankruptcy. If your car payment isn’t the only financial problem you face it’s possible to file for bankruptcy . This will affect your credit over the course of 10 to 15 years which is why it’s not something you want to take on if you have other options. The bottom line Settling the terms of a car loan can be intimidating but resolving the issue now can help you save money in the long run. Be aware of your options before you settle your car loan because it could affect your credit score negatively for seven years. If you aren’t sure which option to choose, think about talking with a credit counselor. Find out more
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Written by the contributing writer Emma Woodward is a former contributor to Bankrate and a freelance writer who loves writing to help people understand personal finance topics. She has written for companies and publications such as Finch, Toast, JBD Clothiers and The Financial Diet. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are passionate about helping readers gain the confidence to manage their finances by providing precise, well-studied details that cut complex topics into manageable bites.
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