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How settling a car loan affects your credit Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial choices by offering interactive financial calculators and tools as well as publishing original and impartial content. This allows you to conduct your own research and compare information for free and help you make financial decisions with confidence. Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The offers that appear on this site are from companies that compensate us. This compensation can affect the way and where products appear on this site, including, for example, the sequence in which they appear within the listing categories in the event that they are not permitted by law. Our loan products, such as mortgages and home equity and other home lending products. However, this compensation will not influence the information we publish, or the reviews you see on this site. We do not cover the universe of companies or financial offerings that might be available to you. SHARE Demaerre/Getty Images

3 min read Published September 19 2022

Written by Emma Woodward Written by Contributing writer Emma Woodward is a former contributor for Bankrate and freelance writer who loves writing articles that help to simplify personal finance topics. 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 Editor: Auto loans Editor Rhys has been writing and editing for Bankrate from late 2021. They are dedicated to helping their readers to take control of their finances by providing concise, well-researched and well-studied information that breaks down otherwise complicated subjects into digestible pieces. The Bankrate promises

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They ensure that what we write ensures that everything we publish is accurate, objective and trustworthy. We have loans reporters and editors are focused on the things that consumers care about the most — the various kinds of loans available, the best rates, the most reliable lenders, the best ways to pay off debt and more — so you’re able to be confident about making a decision about your investment. Editorial integrity

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If you have questions about money. Bankrate has the answers. Our experts have been helping you manage your money for over four decades. We continually strive to provide consumers with the expert advice and the tools required to be successful throughout their financial journey. Bankrate follows a strict policy, which means you can be confident that our content is truthful and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the best financial choices. The content created by our editorial team is objective, factual, and not influenced from our advertising. We’re transparent about how we are in a position to provide quality content, competitive rates and practical tools for you , by describing how we earn money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated for the promotion of sponsored goods and, services, or by you clicking on certain hyperlinks on our site. So, this compensation can influence the manner, place and in what order items appear within listing categories in the event that they are not permitted by law. This is the case for our mortgage home equity, mortgage and other home lending products. Other elements, such as our own rules for our website and whether or not a product is offered in the area you reside in or is within your own personal credit score could also affect the way and place products are listed on this website. We strive to provide a wide range offers, Bankrate does not include information about each credit or financial product or service. Settling the terms of a car loan is a tough choice to take. It impacts your credit score and may harm your ability to get another loan or even open a new line of credit. The majority of people prefer not to have the risk of having to pay . But sometimes, there’s no other alternative. The process of obtaining a car loan requires the involvement of a dealer as a liaison between the lender. They are often able to make a lump sum payment that is less the entire car loan in the event that you pay by a certain date. Before making this decision, it’s important to understand what the benefits and drawbacks are to your and financial goals, as well as your financial situation when you decide which course of action to take. Making a decision about settling an auto loan could affect your credit score. If you pay off the car loan immediately, the impact of your credit rating is negative. The amount that will decrease will vary. In general, the better your score at start, the more it will fall if you decide to settle your loan. But, paying off your car loan could be your most beneficial option over the long haul. Your credit score is negatively affected each time you fail to make an loan payment. If you’re struggling to pay your bills on time and are unable to, paying off your auto loan can allow you to begin rebuilding your credit. Once the loan is paid off, your credit score will initially go down — but you can then focus on . You are able to work towards making the other payments on time, pay down other debts and raise your credit score once more. Opening could negatively affect your credit score, so you should avoid opening new accounts until your credit score is in better shape. A paid-off account will stay on your credit report for seven years after the original delinquency date. This may seem like a lengthy period, but keep in mind that it’s preferable to numerous unpaid payments piling up on your credit report. Additionally, you’ll be taxed on the forgiven loan It’s worth noting that if you undergo an auto loan settlement for less that the value of the loan in itself, the lender usually writes off the amount that is not paid. That amount is considered taxable income by the IRS that means that you could be required to pay federal tax. You will receive a 1099-C cancellation tax of debt notice from the creditor. The notice will let you know how much you have to pay tax on. Because the cancellation is taxed as income it is taxed according to the income tax bracket that you’re in. Settlement of debt vs. repossession The process of settling your car loan is different from . In an automobile loan settlement, you make an agreement in writing with your lender to pay a certain percentage of the debt you incurred. Your debt is then considered settled. But, you’ll still be required to pay tax on your forgiven debt. In the event of repossession, the lender will return the car and then sell it in order to pay some (or all) of the loan debt. If the car is sold at a price less than the amount of the debt, you could still be owed money by the lender. This is referred to as an indeficiency settlement. You can turn in your vehicle and . The lender could be able to take possession of your car without your permission if you are unable to pay payments on your loan payments. Both car debt settlement and repossessions can impact your credit score for the worse. Also, as late payments typically precede both, you may have multiple negative marks in your credit history. Repossession can drop the credit rating by 100 points or higher. The most effective option for your credit score is to pay off the outstanding debt completely, however that’s usually too much of a request. If you can’t achieve that, you should collaborate with your lender to find the best solution. You may want to to determine what would be most suitable for your particular situation. 6 alternatives to settling your car loan Pay off the loan entirely. in full is always the best option for credit. Modify your car loan. Based on your circumstances you might be able to . Speak to your lender to determine if it can help rework the conditions that you have to pay for the loan. Sell your vehicle. If your vehicle loan isn’t affordable look into buying an older vehicle. This could get you lower monthly payments for your vehicle loan. Sell your vehicle. If you’re able to get around without a vehicle, even for a short time, you might want to think about . Let your car be taken away. Repossession of your vehicle can negatively impact your credit score, but it’s a better option than settling your car debt. Consult a credit advisor to determine the most effective options for your credit. Make an application for bankruptcy. If the car payment isn’t the only issue you have with your finances, you could . It could affect your credit over the course of 10 to 15 years so it’s not something you want to do if there are other alternatives. The bottom line is that settling the terms of a car loan can be intimidating however, resolving your issue now will improve your finances over the long term. Consider your alternatives before settling your car loan, as it will affect your credit score negatively for the duration of seven years. If you aren’t sure how to proceed, consider consulting with a credit advisor. Find out more

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Written by Contributing writer Emma Woodward is a former contributor for Bankrate and freelance writer who enjoys writing to help people understand personal finance topics. She has written for companies and publications like Finch, Toast, JBD Clothiers and The Financial Diet. Edited by Rhys Subitch and edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are enthusiastic about helping readers gain confidence to control their finances by providing clear, well-researched information that breaks down otherwise complicated topics into digestible pieces.

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