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Understanding Car Loan Wage Garnishment

Understanding Car Loan Wage Garnishment
Austin Kilham
Austin KilhamUpdated March 14, 2023
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If you fail to pay your auto loan and your car is repossessed, your wages may be garnished in some cases. Of course, this is a situation you want to try to avoid. Fortunately, there are steps you can take to help prevent it. This guide will cover what wage garnishment is, when an auto lender is likely to use it, and how to stop wage garnishment for a car loan.

What Is Wage Garnishment?

Creditors may use a method called wage garnishment when you fail to pay off your debts. It's a legal procedure that allows them to get a court order requiring your employer to withhold a percentage of your earnings to pay off your debt. The employer is required to send the garnished wages to the creditor. Common causes for wage garnishment include outstanding court fees, medical bills, child support, unpaid taxes, defaulted student loans, and in some cases, car repossession or voluntary repossession. 

Can Car Loan Companies Garnish Wages?

If your car has been repossessed, a car loan company can garnish wages in particular circumstances and in certain states. Not all states allow wage garnishment, so check to see if yours does. Here’s how wage garnishment works: If you default on your loan, your lender may repossess your car. To recoup the money you still owe on your loan, the lender will typically sell the car at auction. In the meantime, they may also foot the bill to clean the car and make any minor repairs. If the lender doesn’t make enough money through the sale of the vehicle to cover the outstanding loan plus any other costs they’ve incurred, you’ll owe what is known as a deficiency. You’re responsible for paying off this amount. If you don’t, your lender may take you to court to obtain a judgment against you that allows them to garnish your wages. If this happens, the court will send an order to your employer to withhold a certain amount from your paychecks. Your wages will continue to be garnished until the debt is repaid in full. It’s important to note that federal law prohibits an employer from terminating you if your wages are garnished — up to a point. You can’t be dismissed if you have one wage garnishment order, but that’s where the federal protection ends. State laws may offer further protection. You can check with your state’s labor department.

How Much of Your Wages Can Car Loan Companies Garnish?

If your state allows lenders to garnish your wages after a car repossession, federal law limits the amount they can take to 25% of your disposable earnings or the amount of disposable earnings you have that exceed 30 times the federal hourly minimum wage — whichever is the lesser of those two.Some states have a lower limit for wage garnishment. For example, California limits the amount of wages that can be garnished to 25% of disposable income, or 50% of 40 times the state’s hourly minimum wage — whichever is less.Recommended: How Many Car Payments Can You Miss Before Repo? 

Can You Stop Wage Garnishment for a Car Loan?

You’ll want to avoid having car loan companies garnish wages if you can. For one thing, wage garnishment can be stressful for you and your employer. Even more important, if a lender has resorted to garnishing your wages, it’s likely that some serious damage has been done to your credit score, which can make it more difficult to get credit in the future. Here’s how to stop wage garnishment for a car loan.  

Pay Your Bills On Time

The best way to avoid car repossession and possible wage garnishment is to regularly make on-time bill payments. This will also help you maintain a good credit score. If you encounter financial problems that will make it difficult to repay your car loan, contact your lender immediately. They'd rather not have you default on the loan, so they may work with you to come up with a new payment program to help you get back on track. They could lengthen the term of your loan or break your payments into smaller sums that you pay twice a month, for instance.  If you’re experiencing a more severe financial hardship, you may be able to request a grace period or a deferral on the loan, which allows you to skip a small number of payments. The lender will tack the deferred payments onto the end of your loan. Recommended: 7 Tips For Lowering a Car Payment

Refinance Your Loan

If you’re having trouble making your loan payments on time, consider an auto loan refinance, especially if interest rates have dropped. When you refinance a loan, you pay off your old loan with a new one, ideally at a lower interest rate or more favorable terms. A lower interest rate or lengthening your loan term could reduce the size of your monthly payment, which may help your budget.  Refinancing might be tricky in certain situations, such as with upside down auto loans, for example. If your auto loan is upside down, talk to your lender to see what your options might be. The same is true if you end up having to declare bankruptcy. While it might be possible to get an auto loan after bankruptcy, it will likely be challenging. 

Pay Off Your Deficiency

To prevent wage garnishment, pay the deficient amount, which is what you owe on the loan, if you can. Once you pay the deficiency, the debt is wiped out.

Reinstate or Redeem Your Loan

If your car has been repossessed, it’s still not the end of the road. There are steps you can take to get your car back, if you have the money and you can act quickly. Depending on the state you live in, you may be allowed to reinstate your loan. You’ll have to make all past due payments and pay all costs associated with repossession, such as towing fees. Generally, this needs to happen 10 to 20 days after the car is repossessed. Your lender can give you the specific payment amount and time frame information. You might also be able to redeem your loan. In this case, you’ll need to pay off the entire balance of the loan plus any costs associated with the repossession. At this point you’ll own the car outright. Again, you need to act quickly in order to do this.

Buy Back Your Car

If reinstating or redeeming your loan isn't possible, you may be able to buy back your car when your lender sells it at auction. Not every state allows this option, however, so find out if yours does. 

The Takeaway

Wage garnishment is a situation you want to avoid if possible. To prevent your wages from being garnished, make your car payments on time if you can. If you’re experiencing financial distress, reach out to your lender right away to see if they will work with you on a payment plan. Another option is to refinance your car loan, possibly lowering your monthly payments  if you can get more favorable interest rates and terms. Lantern’s refinancing tool can help you compare multiple offers from top lenders, so you can find a loan that works for you. Shop, prequalify, and apply for an auto refinance loan all in one place.

Frequently Asked Questions

Can a car loan company garnish your wages?
What is the most car companies can garnish from your paycheck?
How do I stop wage garnishment for a car loan?
Photo credit: iStock/AndreyPopov
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About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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