A bad credit car loan can help you get a vehicle, but you must keep up on payments. Defaulting on a bad credit car loan can have serious consequences. Your credit score may take a big hit, limiting your ability to get future loans. It might also put you at risk of having your car repossessed.
Your Car Will Be Repossessed
If you have a car on loan and default, the lender will send you a notification. You’ll lose your vehicle if you don’t respond in good time. Typically, bad credit car dealers send legal officers to retrieve vehicles from loan defaulters even without warning. Then, they sell it at auction as soon as possible, and you’ll have to find another ride.
Sometimes, the lender disables the car remotely, so you will only drive it once you clear the balance. This can be a huge financial blow if you have invested hundreds of dollars into the vehicle over time.
Your Credit Score Will Plummet
Missed payments can drastically damage your credit score. A charge-off may not affect your credit score much if it’s already in the deep subprime range (300 – 500). However, you’ll face a big blow if you have just started to rebuild your rating with your current bad credit auto loan.
When your credit score takes a dive because of this unfortunate scenario, it takes years to recover. The defaulted car loan lingers in your file for six years — potentially affecting your ability to get approved for anything else (including housing).
It May Cost More in the End
If you start over to pay off the balance, you could incur more fees. Bad credit lenders usually charge late fees, collection costs, and higher interest. Your dealer can only waive these fees if you commit to making timely payments.
Your Debt-to-Income Ratio (DTI) Increases
A DTI is a number that represents your borrowing risk. It is your total monthly debt divided by your gross monthly income. The higher your DTI, the more likely you will default on a car loan in Canada.
If you’re looking to buy a car and have bad credit, remember that lenders will look at your debt-to-income ratio when deciding whether or not to approve your application. They might refuse you even if you have a good job.
You Could Face Legal Action
After defaulting on your bad credit car loan, the lender will likely go after your wages and bank account. They do so by serving a garnishment order on your employer or garnishing your wages directly.
Garnishments become an option when there’s no other way for the lender to recover their money. This route is more convenient than suing you in court when there’s relatively little evidence that you’re responsible for the debt.
Again, if a car dealership sues you for money due (interest or penalties), you’ll probably need to hire a lawyer to represent you in court proceedings. A lawyer will work with you on all aspects of the dispute so that your options are considered and weighed against each other. You will incur even greater costs as a result.
The repercussions of not repaying your debt with bad credit car finance dealerships have a significant financial and legal impact. Consider the risks and make an informed decision before signing any financing contract. Don’t wait until it’s too late. Educate yourself now so you don’t end up in a situation you can’t escape.