Given the circumstances below, I am trying to find the effect over a year or two for this person to give up their car — defaulting on the loan.
This person asked me for advice, and it was beyond me – let me know if you have the answer and some way to justify it against helping their credit score:
The person is paying on a car, has had it 1 year, and is getting charged 18%+ interest.
They now owe more than the original cost on it, due to penalties and late charges. They have been late 10 of the last 12 months, and are 60 to 90 days past due each month. There is no spare income for the person, and this will continue if they keep the car.
Their credit already very poor. About 500.
They can no longer make the payments. Or better put, if they try and make the payments, they will be reported as 60 or 90 days late for the next few years. They cannot make them on time as they have other significant debt. The person has already exhausted arrangements with the loan company or their other loans. They have no excess cash.
If they give up the car now, and then in a few months, are able to begin making other payments (utilities, and other debt, etc.) on time for the next year to two years, will their credit improve and can someone estimate how much? They have no revolving debt, but do have past due accounts. They do not have a home, but rent.
Or, will this defaulted car loan nullify any other positive credit moves the person makes in the next year to two years?
The person said the loan company will sell the car, but there will be a gap between that sale price and what the car is worth (makes sense). The gap will be about $4,000 to $6,000 from the deficiency of what the car is worth versus their loan. If the person has other significant debt, can they expect this company to let them make payments anyway on the deficient amount or will they demand it all at once?
Again, they are past the point where they CANNOT consider options like refinancing, making arrangements with the dealer, etc. They want to know if the default on this default can be offset right away with better payments on other debt, and raise their credit score, or if this default will keep them at very poor credit over the next year or two.
How long will the default stay on their report, and will it prevent them from getting approved for a mortgage in the 2 to 7 year timeframe, assuming they can get other payments in line?
Don’t know about the credit score stuff, but the definitely cannot afford the car. It needs to go. Turning it back to the bank is not always the best deal, but sounds like all they can do right now. As for credit score – I would look more into paying cash for things. The next car needs to be paid for in cash – a beater or whatever, but no more debt.
I can’t answer many of your questions. But from my ex-husband’s experience I can tell you one thing for sure. If this person gives up the car it will be sold, usually at auction and usually for less than it’s worth. Then the loan company or bank will come after this person for the difference in loan value minus selling price. Where my ex lives that means for about 12 weeks his pay was garnished, 3 to 6 weeks free, then another 12 of being garnished. And each round there is more in legal fees, interes, etc, so the amount due won’t decrease fast. My ex had to deal with it for seven years before the statute of limitations went into effect. Oh, and they went after his tax refund as well, I believe it was only his state but I’m not sure it happened about 12 years ago.