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 occurs when your lender doesn't think you'll be paying back the car loan in the future.
What Is 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 to Collection Agency
A lender with a charged-off loan may sell the loan to a collection agency, according to ClearPoint Credit Counseling Solutions. Installment loans are charged-off after an account has been delinquent for 120 days or more. 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, as it has the option to attempt to collect the debt using their own in-house staff. 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 Credit.com. A charge-off often means more than one missed payment, as well as numerous other negative actions that can seriously damage a credit score.