As with many types of financing, paying your auto loan bills on time is essential. But sometimes life happens. Maybe you don’t have enough money to pay all your bills, or perhaps you didn’t set up automatic payments and forgot to make a payment. Whatever the reason, missing a vehicle payment isn’t a good feeling, especially when it can impact your credit score.
While there’s typically a grace period for late auto loan payments, being late on your vehicle loan can cost you, especially when it comes to your credit score. Here’s how late auto loan payments affect your credit score and other implications to be aware of.
When To Take Out an Auto Loan
Auto loans can help finance a new or used car when you don’t have the money to pay for your new ride outright. These loans allow you to pay off your vehicle over time, making payments every 30 days with additional interest until it’s paid off.
Depending on how much you apply for and your monthly payments, loan terms typically follow a two- to six-year payment schedule. When you opt for longer loan terms, you’ll generally pay more in interest. However, doing so can help you keep your monthly payments affordable, so you don’t fall behind on payments in the future.
Ultimately, the terms and conditions of a car loan change based on the car, your personal credit history, and the loan amount you apply for.
What is Considered a Late Payment?
When discussing late auto loan payments, how late is too late? The answer is, once you’ve missed the due date on your car payment agreement, it’s late.
However, lenders don’t report late payments to the credit bureaus until they are 30 days past due. After that, they report them every additional 30 days past due, including 60, 90, or more days late. The later you make your payments, the worse it will affect your credit score.
In most instances, lenders have a 10-day grace period for auto loans. If you’re unsure how your lender handles late payments, you can find information about the grace period and other details, including your loan balance, interest rate, term, and late fees, under your loan’s terms and conditions.
Impacts of a Late Auto Payment
There are several ways a late auto loan payment can affect your credit and overall financial health, including decreased credit scores, affected credit reports, late fees, and repossession.
Decreased Credit Score
When you make a late auto payment, the amount you owe on your loan, how late your payment is, and how often you are late on your bills, all play a role in what happens next. However, just one late payment is all it takes to lower your credit score.
Payment history usually accounts for roughly 35% of your credit score, making it one of the most important factors when calculating your score. If you have good or excellent credit and miss even one payment, you can expect your credit to take a significant hit.
Impacted Credit Reports
If your auto loan payment is late by over 30 days, it may end up on your credit reports. When this happens, the major credit bureaus are notified, which triggers the late payment showing up on your credit reports. Similar to other adverse financial events, late payments can stay on your credit reports for up to seven years. Because of the long-term impact of a late payment, it’s crucial that you keep a close eye on your personal finances and do everything you can to make on-time payments.
As if a ding on your credit report and a decrease in your credit score aren’t enough, you could also get hit with a late fee on your late auto payment. Even if you are just a day late on your auto loan, you could be charged a fee on your next billing statement. While one late fee might not be a big deal, these can add up over the long-term if you continue to miss payments.
Perhaps one of the most serious consequences that can result from late auto payments is repossession. If you continually are making late payments, credit card companies and lenders may consider this a default on your loan, and could repossess your vehicle at any time, without notice.
Every lender follows a different timeline when it comes to defaults. While some may declare your loan in default after one missed payment, others will wait 90 days or longer. It’s important to know your loan terms and conditions to avoid this situation since these terms could change depending on your previous loan history.
In the event of repossession, your creditor’s rights only go so far. Depending on where you live, there are rules about how creditors may repossess the car and resell it. Understanding your rights in this situation is critical.
What to Do When You’re Late on Your Auto Loan
If you can afford your auto loan and simply forgot to pay it by the due date, it’s in your best interest to pay it as soon as possible. If you’re late because you’re struggling to afford your car payments, however, it’s time to get in touch with your lender to see if they will renegotiate your vehicle loan’s rates and terms and what other options are available to you.
One of the first things you should do is review your budget to see if there is anywhere you can reduce your expenses to free up some cash. If your money is stretched thin and you need some breathing room, refinancing your auto loan could help you extend the loan term by months or possibly years to lower your payments. While this will cause more interest in the long run, it can help you avoid missing payments and hurting your credit score and credit history.
Another option to discuss with your lender is deferring your car payments. If you don’t have the money on hand to make your loan payments but expect to have enough funds later, this may be a smart option for you. With a deferment, you’re essentially altering your due date by postponing your next payment. In most cases, deferring your car payment won’t negatively impact your credit score either.
If you believe you have been paying your bills on time but received a late fee, you can work with your lender to find a resolution to the error. They will investigate and provide you with an explanation on the issue..
How to Improve Your Credit After a Late Payment
While you should avoid late car payments, the good news is that if you finance your vehicle through lenders like T&I Credit Union, we are a community-based financial institution that has your best interests at heart.
Stay on Top of Your Car Loan Payments
Calling your lender to explain your situation and ask about your options may help you make adjustments to your loan that make it possible to make on-time payments going forward and ultimately keep your car. Once you can afford your loan payments and can pay on time, you can improve your credit score. The better your credit score, the more easily you can apply for auto refinancing for a lower interest rate in the future.
It’s important to remember that the impact of one or more late payments on your credit decreases over time. By keeping up with your payments and exercising a little patience, you can get your credit score back up.
One way to stay on top of your car payments and improve your credit score is to enroll in autopay or use calendar reminders. If you’re forgetful, this is helpful to ensure your absent-mindedness doesn’t cost you down the road.
Reduce Credit Utilization
If you’ve got a good credit mix and utilize credit cards, reducing your credit utilization ratio can also help improve your score. This is an important component of your credit score, and by staying below 30% credit utilization among all your credit cards, you can increase your credit score.
The simplest way to do this is to pay down your credit card balances and charge less to your credit cards. To keep track of your credit card spending, look at the information your credit card companies send you each month or try using free credit monitoring apps.
Find the Right Auto Loan for You
One of the best ways to avoid late payments on your auto loan is to find a lender who offers affordable rates and terms that make it easy for you to make your monthly loan payment. When you finance your vehicle through T&I Credit Union, you can get the help you need to afford your vehicle and make on-time payments. To learn what auto loan options are available to you, call (248) 397-9571 to speak to a loan officer.