If you don't stay up to date on your car loan payments, your lender has every right to haul your car off and sell it at an auction. Even worse, this repossession will cause your credit score to tank. You can undo some of the damage by paying the debt, but you can't erase a repossession from your credit report.
The credit bureaus Experian, Equifax and TransUnion put together credit reports based on information from public records and your creditors. They'll find out about the repossession either through court records or directly from your lender. The bureaus will be fair and show payments when they're made. However, they'll also keep the repossession in your file for up to seven years.
Lenders view cars as depreciating assets because vehicles lose value over time. If you owe more on your car than it's worth, your lender will lose money when it goes to auction. The money from the auction will pay down the loan balance, but it will leave a residual balance that credit bureaus consider past due debt. Like the actual repossession judgment, the unpaid debt will hang around on your credit file for up to seven years.
Your credit score should get a slight boost when you pay off a past due debt. However, you can't expect lenders or the credit bureaus to forgive and forget all those late payments. The good news is recent events have a greater impact on credit scores than old ones. So, if you start and keep paying your other bills on time, the repossession will ultimately stop dragging down on your credit score.
People often use the words paying and settling interchangeably when they talk about outstanding debts. From a credit perspective, the words have very different meanings. Paying debt means paying it in full. Settling means reaching an agreement with your lender to repay a portion of the debt. The remaining balance stays on your credit report as an inactive but unpaid debt. That could cause other lenders to think twice about lending to you as it suggests you're unwilling or unable to repay debts. Needless to say, settling a repossession has little or no positive impact on your credit score.
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