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How settling a car loan affects your credit Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators that provide objective and original content. This allows users to conduct research and analyze information for no cost to help you make informed financial decisions. Bankrate has agreements with issuers including, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The deals that are displayed on this site are from companies that compensate us. This compensation may impact how and where products are displayed on this site, including, for example, the order in which they may appear in the listing categories and other categories, unless prohibited by law for our loan products, such as mortgages and home equity and other home loan products. This compensation, however, does have no impact on the information we provide, or the reviews that you read on this site. We do not include the vast array of companies or financial offerings that might be available to you. SHARE: demaerre/Getty Images

3 min read published September 19, 2022

Emma Woodward Emma Woodward Written by Contributing writer Emma Woodward is a former contributor to Bankrate and a freelance writer who is passionate about writing to demystify personal finance topics. Emma has contributed to companies and publications such as Finch, Toast, JBD Clothiers and The Financial Diet. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are committed to helping readers to take control of their finances by providing concise, well-researched and well-studied facts that break down complex topics into manageable bites. The Bankrate promises

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If you have questions about money. Bankrate can help. Our experts have been helping you master your money for over four decades. We continually strive to give our customers the right guidance and the tools necessary to make it through life’s financial journey. Bankrate adheres to a strict code of conduct , so you can trust that our content is honest and accurate. Our award-winning editors, reporters and editors create honest and accurate information to assist you in making the best financial choices. Our content produced by our editorial staff is factual, objective and is not influenced through our sponsors. We’re transparent regarding how we’re capable of bringing high-quality content, competitive rates, and practical tools for you , by describing how we earn our money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We receive compensation for the promotion of sponsored goods or services, or through you clicking specific links on our site. Therefore, this compensation may influence the manner, place and when products appear in listing categories, except where prohibited by law. We also offer mortgage, home equity and other products for home loans. Other elements, such as our own rules for our website and whether the product is offered in your area or at your own personal credit score could also affect the way and place products are listed on this site. While we strive to provide an array of offers, Bankrate does not include the details of every financial or credit product or service. Making a decision to take out an auto loan is a difficult decision to make. It affects your credit score, and can affect your chances of getting another loan or to open an account with a new credit line. Many people would prefer to avoid this . But sometimes, there’s no other option. The process of obtaining a car loan involves the involvement of a dealer as a liaison with the lender. They may be able to offer a lump-sum payment that is less the entire car loan when you pay it by a specified date. Prior to making this choice it’s crucial to know what the benefits and drawbacks are of your financial and financial goals plus your current financial situation before deciding what to do. Making a decision about settling a car loan can affect your credit score. If you pay off the car loan, the immediate impact of your credit rating is negative. The amount it decreases will vary. The higher your score at start your score, the more it’ll decrease if you pay off your loan. But, paying off your car loan could be your most beneficial option over the long haul. Your credit score gets affected every time you miss a loan payment. If you struggle to make regular payments and you aren’t able to do so , settling your auto loan will allow you to start rebuilding your credit. When the loan is paid off the credit score will begin to decline however, you will be able to then concentrate on . It is possible to make the other payments on time or pay off other loans and increase your credit score once more. Opening could negatively affect your credit, so you may want to avoid any new accounts until you’re credit score is in better shape. The account that is settled will be on your credit score for seven years after the original delinquency date. That may seem like a lengthy period, but keep in mind that it is preferable to many missed payments piling up on your record. Taxes will also be imposed on the forgiven debt It’s important to note that if you receive the process of negotiating an auto loan settlement that is less than the amount of the loan it self, the creditor usually will write off the difference. The amount you pay is considered tax-deductible income by the IRS that means that you’ll have to pay federal taxes. You should receive a 1099-C cancellation of tax on debt notice from your creditor. The notice will let you know the amount you must pay taxes on. Because this is considered income it will be taxed at the tax bracket for income you’re in. Car debt settlement vs. repossession Settling your vehicle loan differs from . When you settle your auto loan settlement, you agree with the lender for the payment of a portion of the original debt. The debt is then to be settled. But, you’ll be required to pay tax on your forgiven debt. In the event of repossession the lender will return the car and then sell it to pay off a portion, or even all your loan debt. If the car is sold at a price less than the amount of your debt, you could still owe money to the lender. This is called the deficiency payment. You may surrender your vehicle and . The lender could be able to repossess your vehicle without your consent in the event that you do not make your loan payments. Both the settlement of your car debt and repossession can affect your credit score to the detriment of. Also, as late payments typically precede each other, you may be left with multiple negative marks in your history with credit. Repossession can drop your credit score by 100 points or higher. The most effective option for your credit is always to pay off your outstanding debt completely, but this is usually too much of an ask. If you’re not able to accomplish that, then cooperate with your lender to come up with the best solution. You may want to consider what’s most suitable for your particular situation. Six options to settle your car loan Make sure you pay off the loan in full. Completely is always the best option for your credit. Modify your car loan. In the case of your particular situation you might be in a position to . Speak to your lender to see whether it is possible to modify the conditions that you have to pay for the loan. You can trade in your car. If your vehicle loan is too expensive look into buying an older car. This could get you a lower monthly payment for your car loan. Sell your vehicle. If you are able to travel without a vehicle, even temporarily, you might want to think about . Allow your car to be repossessed. Repossession of your vehicle can negatively impact your credit score, but it’s a better option than settling your car debt. Talk to a credit counselor to find out the best choices for your credit. File for bankruptcy. If your car loan isn’t the only financial problem you face, you could . This will affect your credit for up to 10 years, so it’s not something you’d like to do if you have other alternatives. The bottom line is that settling a car loan can be intimidating however, resolving your issue today will help your financial situation in the long run. Be aware of your options before you settle your car loan since it will have a negative impact on your credit score for the duration of seven years. If you aren’t sure how to proceed, you might want to consider speaking with a credit professional. Find out more


Written by a contributing author Emma Woodward is a former contributor for Bankrate and freelance writer who is passionate about writing to demystify personal finance issues. Emma has contributed to companies and publications like Finch, Toast, JBD Clothiers and The Financial Diet. Written by Rhys Subitch Editor: Auto loans Editor Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to control their finances by providing precise, well-studied details that cut complex topics into manageable bites.

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