What Is a Deficiency Balance on an Auto Loan?

Austin KilhamUpdated December 28, 2022

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If you fail to make your auto loan payments, your lender can repossess your car. While repossession can feel pretty final, you may still have responsibilities to your lender. In fact, you may still owe them money in the form of a deficiency balance.Here’s a look at what you need to know about how a deficiency balance after auto repossession works and your obligations to pay it.

How Does a Deficiency Balance Work?

Auto loans are a form of secured loan. When you take one out, your lender will use your vehicle as collateral. If you fail to pay off the loan, they can repossess the vehicle and sell it to recoup their losses. Unfortunately, selling the vehicle doesn’t always cover the balance of the loan, and you may be on the hook for paying the difference, otherwise known as the deficiency balance on an auto loan.

Repossession of Car

Your lender holds on to possession of your vehicle title until you have paid off your auto loan, at which point the title is turned over to you. In the meantime, your lender allows you to use the vehicle as long as you’re making on-time payments. If you are delinquent on your loan, your lender can begin taking steps to repossess your vehicle — though repossession generally doesn’t take place until a loan has been in default for 90 days.Lenders will usually let you know when you’re in default and that your car is at risk of being seized. However, they can repossess vehicles without notice, and they don’t need to have a court order to do so.

Repossession Sale

Once a lender has repossessed your car, it’s unlikely you’ll be able to recover it, though some states allow a certain period of time during which you can reinstate your car loan. This usually involves paying your lender’s repossession expenses on top of past-due loan amounts.If your state doesn’t offer this option, or you choose not to take advantage of it, your lender will sell your former car to recover the money you owe, usually at auction. By law, lenders must put a “commercially reasonable” amount of effort into the sale of the vehicle. However, those attending the sale are often car dealers whose incentives lie in keeping prices as low as possible. That means a car could easily sell for much less than it’s worth.Once a sale goes through, your lender subtracts the sale price from the balance of the loan. They’ll then add the costs of repossessing, storing, and selling the vehicle. The resulting amount is the deficiency.Generally speaking, your lender must send you a notice that the car will be sold, including the date, time, and place of the sale. They must also let you know if you’ll be liable for any deficiency after the sale and provide contact information you can use to find out how much you owe.

What to Do If You Owe A Deficiency Balance

Some states place restrictions on whether or not you’ll need to pay a deficiency. For example, balances under a certain dollar amount may be exempt. Other states have no such rules.In some cases, you may be able to negotiate with the lender to modify the deficiency balance. Otherwise, you’re required to pay it in full.

What Happens If You Can’t Pay A Deficiency Balance?

If you can’t pay a deficiency balance in full, contact your lender immediately. You may be able to work out either a settlement with them or a repayment plan:

Settlements are often a smaller percentage of what you owe. Generally, you’ll need to be able to prove some financial hardship, such as being laid off, disabled, or unemployed. Settlements, when accepted by the lender, typically must be paid in full.
Repayment plans may allow you to pay off the debt in regular, more manageable increments.

If you refuse to pay off the balance, lenders may sell the debt to a collections agency, or they may file a lawsuit against you. This might result in a lien or wage garnishment. Should you get sued, you may have legal recourse. You may not have to pay off a deficiency balance if you live solely off federal benefits, for instance. You also may defend yourself against a suit if you can prove that the lender did not make a commercially reasonable effort to sell your former vehicle.In some extreme cases — especially if this isn’t the only debt you’re struggling to pay — you may consider filing for bankruptcy. This may allow you to discharge unsecured debts, including deficiency balances.Recommended: Can You Get Auto Loans After Bankruptcy?

How Long Do You Have to Pay a Deficiency Balance?

If you owe a deficiency balance, your lender will typically contact you immediately and let you know the date by which the balance must be paid.

Does a Deficiency Balance Affect Your Credit?

A deficiency balance does not bode well for your credit score. In fact, you can face repercussions at multiple points along the way.For one, the circumstances leading up to the delinquency balance will harm your score. That’s because your track record of paying your debts on time is the biggest factor in calculating your credit score. As such, late payments will have a negative impact on your score.Your score will take another hit when you default on the auto loan, and again when the car is repossessed. A repossession will stay on your credit score for seven years. A voluntary repossession of the vehicle may have a less severe impact. If you refuse to pay your delinquency balance and the debt is sent to a collections agency, your credit score can take another negative hit. The collections account will also stay on your credit report for seven years.

Avoiding a Deficiency Balance

The best way to avoid a deficiency balance on an auto loan is to be sure to make auto loan payments on time and in full. If you’re having trouble making payments, talk to your lender immediately — they may be able to help make the debt more manageable.Other ways to manage debt include debt consolidation loans or refinancing your auto loan.

The Takeaway

If you default on your auto loan and your lender takes back your car, a delinquency balance is an unfortunate probability you may have to contend with. Except in rare circumstances, you’ll likely have to pay off this balance right away. Doing so can help protect your credit score from further damage. To avoid this ramification of defaulting on your loans, it’s important to stay on top of managing your debt and do everything you can to make on-time payments.

3 Auto Loan Refi Tips

Refinancing your auto loan could lead to lower monthly car payments and more money in your budget. Lantern by SoFi can help you find the right auto loan refinancing option for you.
Shortening the term of your auto loan may increase your monthly payments, but you’ll likely pay less in interest over the life of the loan.
You may have trouble refinancing the loan on a car that is worth less than what you owe. For more info, check out When Is the Right Time to Refinance a Car?

Frequently Asked Questions

How long does a deficiency balance last?

What happens after you pay a deficiency balance?

How do you negotiate a deficiency balance?

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About the Author

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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