What Are Car Loan Charge-Offs?

Q: Is a charge-off better than a repossession?

A car loan charge off is not necessarily better than a repossession. A car loan charge-off in many cases may lead to repossession, and both events may cause your credit score to plunge. There are different types of car loans . Borrowers of unsecured car loans do not face the risk of repossession, whereas car repossession may cover the full amount of what you owe if you’ve defaulted on a secured car loan.

Q: Is it possible to avoid a charge-off?

Yes, it’s possible to avoid a charge-off by making required loan payments when due. It may also be possible to avoid a charge-off by making payments within a grace period. You may avoid a charge-off by avoiding serious delinquency on a consumer loan .

Sulaiman Abdur-RahmanUpdated February 14, 2025

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

A car loan charge off is something that may happen if you default and fail to repay your car loan. A lender may charge off auto loan debts that become 120 days past due. Lenders may also charge off car loan debts deemed uncollectible.Auto loan charge off practices may damage your credit score. Below we highlight how a lender may charge off on car loan debts.

How Does a Car Loan Charge-Off Work?

A car loan charge may occur if you default and fail to repay your car loan. What is a charge-off on a car loan? It’s an accounting practice. If you’re 120 days past due or are experiencing serious delinquency, your lender may assume a loss and report your loan status to the credit bureaus as charged off.A lender may charge off auto loan debt if you fail to make required car loan payments. This can cause your credit score to plunge. A charge off may not involve debt forgiveness, so you may be responsible for paying any outstanding principal, interest, and fees you owe on the charged-off account.Recommended: 12 Questions to Ask When Buying a Used Car 2025

Charge-Off vs Repossession

A charge off on car loan debt is an accounting practice used by lenders to record certain loan losses. Repossession, meanwhile, is when a lender seizes a vehicle from a borrower who had defaulted on a secured auto loan.Lenders may charge off car loan debt if a borrower is 120 days past due on making a required car loan payment. As mentioned above, this can cause your credit score to plunge. A charge off represents a loss to the lender, and repossession is a way that a lender may recover credit losses associated with a loan default. Borrowers who default on a secured auto loan may have their loan account charged off and their vehicle repossessed.You may still owe money if the resale value of your repossessed vehicle is insufficient to cover the outstanding balance of principal, interest, and fees. Here are other factors to keep in mind if you’re having difficulty paying off your car loan:

Your credit score may plunge if you lose your vehicle to car repossession
Voluntary repossession can also damage your credit
It’s possible to reinstate your car loan after repossession
Refinancing after repossession may be an option for some borrowers

How Does a Car Loan Charge-Off Impact My Credit Score?

A car loan charge off may cause your credit score to plunge. What is a charge-off on a car loan? It’s an accounting practice used by lenders to record certain loan losses. Your lender may charge off your car loan if you’re 120 days past due on making a required loan payment. Having your car loan charged off can leave a derogatory mark on your credit report for seven years.Borrowers with bad credit may have the following options:

You may finance a vehicle purchase with a bad credit score, but the lender may charge a high rate of interest
Borrowers with bad credit may qualify for subprime auto loans
You may refinance a car loan with bad credit

Recommended: What Credit Score Do You Need to Refinance a Car?

When Does a Lender Issue a Car Loan Charge-Off?

A lender may issue a car loan charge off in the following situations:

A borrower becomes 120 days past due on making a required car loan payment
A lender determines that a borrower’s outstanding car loan debt is uncollectible
A lender learns that a borrower’s outstanding car loan debt has been discharged in bankruptcy

Getting a car loan after bankruptcy can be difficult at best. A bankruptcy is a derogatory credit event that can appear on your credit report for up to 10 years.

What Happens if Your Car Loan Is Charged-Off?

Here is what may happen if your car loan is charged off:

A lender may record your charged-off car loan as a credit loss for accounting purposes
A lender may sell your unpaid debt to a debt collector
You may still owe outstanding principal, interest, and fees if the lender charges off your car loan without forgiving your debt
A lender may report your charged-off car loan status to the credit bureaus, which can damage your credit score
You may lose your vehicle to repossession
Your lender may sue you for a deficiency judgment if the resale value of your repossessed vehicle is insufficient to cover the balance of what you owe

Avoiding a Car Loan Charge-Off

You may avoid a car loan charge off by making required car loan payments when due. Paying off a car loan gives you full ownership of the car and may serve as evidence of your creditworthiness.Recommended: How Do Car Loans Work

The Takeaway

Buying a cheaper car or refinancing for a lower monthly payment may help you avoid a car loan charge off. What is a charge-off on a car loan? It’s when your lender takes an accounting loss as a direct result of you defaulting on your car loan. An auto loan charge off can damage your credit score and may lead to other negative consequences.

Frequently Asked Questions

What happens when a car loan is charged-off?

Is a charge-off better than a repossession?

Is it possible to avoid a charge-off?

Photo credit: iStock/NiseriN

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About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.

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