What Does a Charge-Off Mean on a Car Loan?

A charge-off will damage your credit for years.

A charge-off will damage your credit for years.

When you get a car loan, your lender expects you to make regular payments until you've paid back the money you borrowed. When you fail to make those payments, the lender understandably gets nervous. At some point the lender might decide that you will probably never pay back the loan, in which case it will label the loan a "charge-off."


A charge-off is an accounting term that lenders use when they have decided the loan is no longer an asset. When a lender charges off a loan, it changes the loan's status to a loss for accounting purposes. A charged-off car loan, therefore, is a loan that the lender believes will no longer make it any money.

Repossessions and Charge-Offs

Anytime you have a car loan and fail to make a payment, the lender may choose to repossess the car. Repossession is a way the lender tries to recover losses by taking the car and selling it. The sale price of the car may not cover the outstanding loan balance, and the lender may then determine that the loan is a charge-off. However, a lender may also change the loan to a charge-off prior to repossession or at any point after the borrower fails to make a payment.

Loan Sale

A lender with a charged-off loan may sell the loan to a collection agency, according to financial adviser Suze Orman. At that point, the borrower will be responsible for repaying the loan to the collection agency that purchased it. It is up to the lender to determine if and when it wants to sell the loan. Because a charge-off only changes the way the creditor categorizes the loan, it does not mean that the borrower is relieved of the legal obligation to pay it back.

Credit Score Impact

A car loan that results in a charge-off will have a long-term effect on your credit score and will make it much harder for you to receive any new forms of credit. Even a single missed payment can result in a credit score decrease of from 90 to 110 points, according to Yahoo Finance. A charge-off often means more than one missed payment, as well as numerous other negative actions that can seriously damage a credit score.

About the Author

Roger Thorne is an attorney who began freelance writing in 2003. He has written for publications ranging from "MotorHome" magazine to "Cruising World." Thorne specializes in writing for law firms, Web sites, and professionals. He has a Juris Doctor from the University of Kansas.

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