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3 min read Published September 19, 2022

Written by Emma Woodward Written by Contributing writer Emma Woodward is a former contributor for Bankrate and a freelance writer who is passionate about writing to help people understand personal finance issues. Her writing has appeared in 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 writing and editing for Bankrate from late 2021. They are committed to helping readers to take control of their finances by providing precise, well-researched, and well-documented information that breaks down otherwise complicated topics into bite-sized pieces. The Bankrate promises

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This compensation could affect the way, location and when products appear within listing categories, except where prohibited by law. This is the case for our mortgage, home equity and other home lending products. Other elements, such as our own website rules and whether or not a product is offered in the area you reside in or is within your own personal credit score may also influence the manner in which products appear on this site. Although we try to offer an array of offers, Bankrate does not include the details of every credit or financial products or services. Settling the terms of a car loan is a difficult choice to make. It impacts your credit score, and can hinder your ability to obtain another loan or open another credit line. Many people would prefer to avoid the risk of having to pay . However, sometimes there is no other viable option. The process of obtaining a car loan involves the involvement of a dealer who acts as a mediator between you and the lender. They may be able to make a lump sum payment that is less the full car loan if you pay by a specified date. Before making this decision it’s crucial to know both the advantages and disadvantages to your financial and financial goals as well as your financial situation when you decide which option to take. Making a decision about settling the terms of a car loan can affect your credit score. If you pay off a car loan immediately, the impact of your credit rating is negative. The amount it will decrease will vary. In general, the better your score was at the start, the more it will go down if you settle your loan. But, paying off your car loan might be the best choice in the long term. Your credit score gets affected each time you fail to make a loan payment. If you are struggling to keep up with your payments and can’t , settling your auto loan allows you to start rebuilding your credit. After the loan is paid off, your credit score will initially go down however, you will be able to then concentrate on . It is possible to make the other payments on time, pay down other loans and increase your credit score. Opening could negatively affect your credit score, therefore it is best to stay clear of any new accounts until you’re credit score is in good shape. A paid-off account will stay on your credit report for seven years following the date of delinquency. This may seem like a lengthy time, but remember that it’s preferable to numerous missed payments piling up on your record. You’ll also pay taxes on the forgiven debt . It’s important to note that if you undergo an automobile loan settlement for less then the total amount of loan it self, the creditor will typically write off the difference. The amount you pay is considered tax-deductible income by the IRS and, therefore, you could be required to pay federal taxes. You should receive a 1099-C cancellation of debt tax notice from the creditor. The notice will let you know the amount you must 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 The process of settling your car loan will differ from . In an automobile loan resolution, you agree in writing with your lender to pay a percentage of the debt you incurred. The debt is then to be settled. But, you’ll still have to pay taxes on the forgiven debt. With repossession the lender will return your vehicle and offer it for sale to pay off some, or even all your loan debt. If the car is sold at a price less than the amount of your debt, you may still owe money to the lender. This is referred to as an indeficiency settlement. You can turn in your car and . The lender could also have the right to take possession of your car without your consent if you do not make your loan payments. Both the process of settling your debts and repossessions can impact your credit score for the worse. Also, as late payments are often the cause of both, you could have numerous negative marks on the history of your credit. Repossession can drop the credit rating by 100 points or more. The best way to protect your credit is always to settle your outstanding debt completely, but this is usually too much of an ask. If you’re not able to accomplish that, then work together with the lender to come up with the best solution. You may want to consider what’s best for your situation. 6 options for settling your car loan Pay off the loan entirely. In full is the best choice for your credit. Modify your car loan. Depending on your situation you might be able to . Contact your lender to determine how you can modify the terms that you have to pay for the loan. You can trade in your car. If your car loan is too expensive look into buying an older vehicle. This may result in lower monthly installments for your car loan. Sell your car. If you’re able to get around without a car temporarily, you may consider . You can let your car be repossessed. Repossession of your vehicle can negatively impact your credit score, but it’s better than settling your car loan. Contact a credit counselor to determine the best choices for your credit. Apply for bankruptcy. If your car payment isn’t the only financial problem you face, you could . The impact on your credit score could last in the ten years following, which is why this isn’t something you’d want to take on if you have other options. The bottom line is that settling the terms of a car loan isn’t easy but resolving the issue now will improve your finances over the long term. Think about your options prior to settling your car loan since it will affect your credit score negatively for the duration of seven years. If you’re not sure what to do, consider speaking with a credit professional. 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Written by a contributing author Emma Woodward is a former contributor for Bankrate and freelance writer who loves writing to help people understand personal finance issues. Emma has contributed to various companies and publications such as 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 from late 2021. They are enthusiastic about helping readers gain the confidence to manage their finances with clear, well-researched facts that break down complex topics into manageable bites.

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