How settling a car loan affects your credit Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial decisions by offering interactive financial calculators and tools as well as publishing original and impartial content. We also allow users to conduct research and compare information for free and help you make financial decisions with confidence. Bankrate has agreements with issuers, including but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The deals that are displayed on this site are from companies that pay us. This compensation could affect how and where products are displayed on this site, including for instance, the order in which they may appear in the listing categories in the event that they are not permitted by law. Our loans, mortgages,, and other home loan products. However, this compensation will not influence the content we publish or the reviews you read on this site. We do not include the universe of companies or financial offerings that might be open to you. SHARE: demaerre/Getty Images
3 min read published September 19 2022
Emma Woodward Emma Woodward Written by Contributing writer Emma Woodward is a former contributor to Bankrate and freelance writer who is passionate about writing articles that help to simplify personal finance topics. She has written for various companies and publications like Finch, Toast, JBD Clothiers and The Financial Diet. The Editorial Team is composed of Rhys Subitch Editor: Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to control their finances with concise, well-researched and well-studied information that breaks down otherwise complex topics into manageable bites. The Bankrate promises
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We are compensated for placement of sponsored products or services, or through you clicking certain hyperlinks on our site. So, this compensation can affect the way, location and in what order products appear within listing categories in the event that they are not permitted by law. This is the case for our mortgage, home equity and other products for home loans. Other factors, such as our own website rules and whether or not a product is offered in the area you reside in or is within your self-selected credit score range can also impact the way and place products are listed on this site. We strive to provide a wide range offers, Bankrate does not include the details of every credit or financial products or services. Making a decision to take out a car loan is a tough decision to take. It impacts your credit score, and can affect your chances of getting another loan or open another credit line. The majority of people prefer not to have an . However, sometimes there’s no other option. Making a loan requires working with a car dealer who acts as a mediator between the lender. They may be able to offer a lump-sum payment that is less than the total amount of your car loan if you pay by a specified date. Prior to making this choice it’s crucial to know the pros and cons to your and financial goals, plus your current financial situation before deciding which option to take. Making a decision about settling the terms of a car loan could affect your credit score When you settle a car loan immediately, the impact of your credit rating is negative. The amount that drops varies. In general, the better your score at beginning, the more it will go down if you settle your loan. But, paying off your car loan might be the best choice for the long run. Your credit score is affected each time you fail to make an loan payment. If you struggle to pay your bills on time and can’t , settling your auto loan will allow you to start rebuilding your credit. After the loan has been paid off and your credit score is restored, it will initially go down — but you can then concentrate on . You can work to make regular payments and pay off other debts , and improve your credit score again. New accounts can negatively impact your credit score, therefore you should avoid new accounts until your credit score is better. The account that is settled will be on your credit report for seven years following the initial date of delinquency. This may seem like a long period, but keep in mind that it is preferable to many late payments that accumulate on your credit report. You’ll also pay taxes on the forgiven debt . It’s worth noting that if you are involved in an auto loan settlement that is less then the total amount of loan in itself, the lender usually will write off the difference. The amount you pay is considered tax-deductible income by the IRS that means that you may have to pay federal tax. The 1099-C cancellation tax of debt notice from your creditor. The notice will let you know how much you need to pay taxes on. Since the cancellation is taxed as income it will be taxed at the tax bracket for income you’re in. Car debt settlement vs. repossession Settling your car loan will differ from . When you settle your automobile loan settlement, you agree with the lender to pay a certain percentage of the original debt. Your debt is then considered as settled. However, you will have to pay taxes on your forgiven debt. In the event of repossession the lender will return your vehicle and offer it for sale to pay off a portion (or all) of the loan debt. If the vehicle is sold at a lower price than the amount of your debt, you may still be owed money by the lender. This is known as the deficiency payment. You are able to surrender your car , and . The lender could also be able to seize your vehicle without your permission if you are unable to pay payments on your loan payments. Both the process of settling your debts and repossession will impact your credit score for the worse. In addition, because late payments typically precede each other, you may be left with several negative marks on the history of your credit. Possessions can lower the score of your credit by as much as 100 points or higher. The best option for your credit is always to settle your debt in full, but this is typically too big of a demand. If you’re unable to do that, try to cooperate in conjunction with your lender to come up with the best solution. You may want to consider what’s most suitable for your particular situation. Six options to settle your car loan You can pay off the loan in full. Completely is always the best option for credit. Modify your car loan. Based on your circumstances you may be able to . Talk to your lender to determine how you can modify the conditions for your loan. Sell your vehicle. If your car loan isn’t affordable, consider for an older vehicle. This could get you lower monthly payments for your car loan. Sell your car. If you are able to travel without a car, even for a short time, you might be thinking about . You can let your car be taken over. Vehicle repossession also negatively impacts your credit score, however it’s a better option than settling your car debt. Consult a credit advisor to find out the best alternatives for your credit. Make an application for bankruptcy. If your car payment isn’t the only issue you have with your finances, you could . It could affect your credit in the ten years following, which is why this isn’t something you’d want to take on if you have other options. The bottom line Settling a car loan could be a bit daunting, but improving your situation now can help you save money in the long run. Be aware of your options before you settle your car loan since it will affect your credit score negatively for the next seven years. If you’re not sure of how to proceed, 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 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. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are enthusiastic about helping readers gain confidence to control their finances by providing clear, well-researched details that cut complex topics into manageable bites.
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