How would defaulting on our three vehicle loans affect our future credit rating?
“Thirty-five percent of your FICO credit score is based on making your payments on time,” said FPA member Frank Molinar, CFP®. “Another 15 percent is based on the length of history of open accounts in good standing. Defaulting on your auto loans will take a large hit on your credit.
“With attention, you should be able to re-habilitate the damage within two to three years after the last of the details are taken care of, even though the repos will stay on the file for a full seven to 10 years.
“Before defaulting, consider the other fallout of a repossession. Once repo'd, the finance company will sell the cars at auction and come after you for the deficit between what they collected and what you owed. Defaulting doesn't let you walk away — those eventual collection accounts, possible judgments, and even garnishments will haunt you for years and further drag down your credit rating.
“If things are bad, you might be better off filing for bankruptcy. In a bankruptcy, there is no deficit balance charged against you, the cars are returned and the loans are written off. Your credit is hit hard initially, but there is no lingering drag on the score — and, you can literally start re-building within one year and make significant progress by the end of two. Before the extreme of bankruptcy, you should also explore talking with your lender(s) — they may be able to rewrite the loans, bringing it current and lowering the rate, if that is feasible.
“Whatever course you take, focus on building your savings as soon as possible.”