Jan 2010
23
As a general rule, most lenders don’t take collections action until a payment is at least five days overdue, which allows for any mailing snafus. And in most cases, a lender is not likely to repossess your car after one missed payment. After all, he doesn’t want your car; he wants the money you owe him.
There are two things you should know if you are ever in this situation:
1. If you have to miss a payment, call and try to negotiate a new due date. Your car may not be repossessed after one missed payment, but your credit may take a hit.
Take this precaution because your credit – believe it or not – is more important than your car.
2. Know that you have much more leeway to solve your payment problems with a creditor before you miss a payment, as you are proactively demonstrating responsibility.
A strong, consistent payment track record is as good as gold when it comes to negotiating. Say, for instance, you took advantage of a 3.99% interest rate for the life of a balance transfer with a credit card you’ve held responsibly for years. Then one month you’re late on a payment. Call the company immediately, explain why your payment is late, and ask them not to change the 3.99% for life rate to the enormous default rate due to a late payment.
With a strong payment history, they may be willing to forgo the rate increase for your one transgression.
If you don’t call before or after you miss a payment, your lenders’ actions may vary depending on your past payment history. Your lender may wait anywhere from 10 to 20 days before giving you a phone call. If you have a strong track record, the missed payment may just show up on your next bill with a penalty fee. This is one of the many reasons having good credit can make your life easier.
Your best action is to call your lender as soon as you know you’re going to miss a payment. Your lender may be able to offer options, such as:
- Change Date Due - Your lender may agree to permanently change the date your payment is due each month. For example, perhaps it would be better to make this payment after your second paycheck of each month instead of the first.
- Deferment - One or two missed payments can be tacked onto the back-end of your loan so that your delinquency is temporarily forgiven but your loan is extended by the payments and subsequent interest charged.
- Government Programs - Your lender may be aware of government programs that can help you out during hard times. For example, military service members may apply for a reduced interest rate on mortgage payments or credit card debt, thanks to the Soldiers and Sailors Civil Relief Act (SSCRA).
One of the first things to do when you know you’re in trouble is reread your lender’s contract. Your contract will typically outline a schedule of what will happen when payments are missed, ranging from late fees to repossession. This simple act of reading your contract may motivate you to pick up the phone and work to save your credit.
While you need to know what the contract has bound you to, keep in mind that this is a starting point for negotiation. More than anything, your creditor wants you to keep making your payments. It costs him money to repossess, auction, or take you to court. If you have a good payment record with your lender up to this point, you will likely find him flexible with arrangements until you’re back in good shape.
Should your payments get behind by sixty to ninety days, you can expect trouble. The lender escalation process starts with a couple of reminder calls, then a couple of letters, and then a deficiency notification.
In the case of a car loan, a letter of deficiency is the last step before repossession. In this letter your lender will outline exactly what you must do to retain your car. If your car gets repossessed, it may be sold at an auction to the highest bidder.
This is not the worst of it.
If the lender does not recoup the loan’s remaining balance through the sale of the car, you are still responsible for the outstanding amount. In fact, the lender may file a lawsuit to obtain a deficiency judgment against you, which translates into another bad mark on your credit report.
Most lenders report borrower information on a monthly basis, so even one payment over 30 days past due is likely to affect your score. And delinquent payments 60 to 90 days past due will remain on your credit record for up to seven years.
This type of negative reporting can seriously hamper your ability to obtain credit in the future. You’ll likely be offered higher interest rates or may be turned down altogether. So: You lose your car, you still owe the money, and your credit score drops so you can’t get a loan for a new one.
Bear in mind that it’s a whole lot easier to manage debt on the front end rather than suffer the consequences of the back end.
For more information, check out these resources:
http://www.pueblo.gsa.gov/cic_text/money/credit-record/crrecord.pdf
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm
http://www.federalreserve.gov/creditcardcalculator/
Kara Stefan is a freelance financial writer and author of Head of Household: Money Management for Single Parents. You can find her at Linkedin or Kara Stefan Communications.
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