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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 mission is to help you make better financial choices by providing you with interactive financial calculators and tools, publishing original and objective content, by enabling you to conduct research and analyze information for no cost - so that you can make informed financial decisions. Bankrate has partnerships with issuers including, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make money The products that appear on this website are provided by companies who pay us. This compensation could affect how and when products are featured on this site, including for instance, the order in which they may appear in the listing categories in the event that they are not permitted by law. This applies to our mortgage, home equity, and other home loan products. However, this compensation will not influence the information we provide, or the reviews that you see on this site. We do not cover the entire universe of businesses or financial offers that may be available to you. SHARE Getty Images/demaerre
3 min read published September 19 2022
The article was written by Emma Woodward Written by Contributing writer Emma Woodward is a former contributor to Bankrate and freelance writer who loves writing to demystify personal finance issues. She has written for various companies and publications like Finch, Toast, JBD Clothiers and The Financial Diet. The Editorial Team is composed of Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are dedicated to helping their readers gain the confidence to manage their finances by providing concise, well-researched and well-studied information that breaks down complicated topics into bite-sized pieces. The Bankrate promise
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There are money-related questions. Bankrate has the answers. Our experts have helped you understand your finances for over four years. We continually strive to give our customers the right guidance and the tools necessary to succeed throughout life's financial journey. Bankrate adheres to strict standards standard of conduct, which means that you can be sure that our information is trustworthy and accurate. Our award-winning editors, reporters and editors provide honest and trustworthy content to help you make the right financial decisions. The content created by our editorial team is objective, factual, and not influenced by our advertisers. We're transparent regarding how we're able to bring quality content, competitive rates, and practical tools for our customers by describing how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We receive compensation for the placement of sponsored products and, services, or when you click on certain hyperlinks on our website. So, this compensation can affect the way, location and in what order products are listed, except where prohibited by law. This is the case for our mortgage or home equity products, as well as other home lending products. Other elements, such as our own rules for our website and whether a product is available in the area you reside in or is within your self-selected credit score range can also impact the manner in which products appear on this website. We strive to provide the most diverse selection of products, Bankrate does not include the details of every financial or credit products or services. Making a decision to take out a car loan is a difficult choice to make. It affects your credit score, and can harm your ability to get another loan or open another credit line. The majority of people prefer not to have this . However, in some cases, there is no other viable alternative. Settling a car loan involves an agreement with a dealer to act as a bridge between the lender. They may be able to negotiate a lump sum payment that is less the total amount of your car loan in the event that you pay within a specific time. Before making this decision it is important to consider both the advantages and disadvantages of your and financial goals, and your financial situation before deciding which option to take. The decision to settle the terms of a car loan will lower your credit score. When you pay off the car loan, the immediate impact on your credit score is negative. Your but the amount it drops will vary. Generally, the higher your score was at the start and the higher it will decrease if you pay off your loan. But, paying off your car loan could be your best option for the long run. Your credit score is negatively affected every time you miss a loan payment. If you struggle to pay your bills on time and you aren't able to do so , settling your auto loan can allow you to start rebuilding your credit. Once the loan has been paid off, your credit score will begin to decline but it is something you can then concentrate on . You can work to make other payments on time or pay off other loans and increase your credit score. The opening of a new account could affect your credit score, so you may want to avoid new accounts until your credit score is in good shape. A paid-off account will stay on your credit report for seven years following the initial date of delinquency. This might seem like a long period, but keep in mind that it's preferable to numerous unpaid payments piling up on your credit score. Additionally, you'll be taxed on the forgiven debt . It's important to note that if you undergo the process of negotiating an auto loan settlement that is not more then the total amount of loan in itself, the lender usually writes off the amount that is not paid. This amount is considered to be taxable income by the IRS, which means you could be required to pay federal taxes. You will receive a 1099-C cancellation tax of debt notice from the creditor. The notice will let you know how much you need to pay taxes on. Because it is taxed like income, it is taxed according to the tax bracket for income you're in. Settlement of debt vs. repossession Getting your vehicle loan is different from . When you settle your auto loan settlement, you sign a contract to the lender to pay a portion of your original debt. The debt is then settled. But, you'll still have to pay taxes on your forgiven debt. With repossession, the lender will return your car and sell it to pay off a portion or all of your loan debt. If the car is sold at a lower price than the amount of your loan, you might have to pay the lender. This is known as a deficiency payment. You can turn in your vehicle and . The lender may also have the right to repossess your vehicle without your consent if you fail to make the loan payments. Both the process of settling your debts and repossession will impact your credit score in a negative way. And, since late payments often precede both, you could have several negative marks on your credit history. Repossession can drop your credit score by as much as 100 points or more. The best way to protect your credit is always to pay off your outstanding debt completely, but that's typically too big of an ask. If you're unable to accomplish that, then collaborate together with the lender to come up with the best solution. It is possible find out what is best for your situation. Six options to settle your car loan Make sure you pay off the loan completely. In full is the best option for credit. Modify your car loan. In the case of your particular situation, you may be in a position to . Contact your lender to determine if it can help rework the terms of your loan. You can trade in your vehicle. If your car loan is too expensive, consider for an older vehicle. This could get you lower monthly installments for your vehicle loan. Sell your car. If you can get around without a car, even for a short time, you might consider . Allow your car to be repossessed. The repossession of your car can also affect your credit score, but it's a better option than settling your car debt. Consult a credit advisor to learn about the most effective options regarding your credit. File for bankruptcy. If your car loan isn't the only financial problem you face it's possible to file for bankruptcy . The impact on your credit score could last for up to 10 years, so it's not something you'd like to take on if you have other options. The bottom line is that settling a car loan isn't easy, but improving your situation today will help your financial situation in the future. Consider your alternatives before settling your car loan since it will affect your credit score negatively for the duration of seven years. If you're not sure how to proceed, consider talking with a credit counselor. Learn more
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Written by Contributing writer Emma Woodward is a former contributor to Bankrate and freelance writer who loves writing to help people understand personal finance topics. She has written for businesses and publications such as Finch, Toast, JBD Clothiers and The Financial Diet. Written by Rhys Subitch and edited by Auto loans Editor Rhys has been editing and writing for Bankrate since the end of 2021. They are committed to helping readers gain confidence to manage their finances by providing concise, well-researched and well-informed details that cut complicated topics into digestible pieces.
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