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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 aim is to assist you make smarter financial decisions by offering interactive financial calculators and tools that provide objective and original content. This allows you to conduct research and analyze information for no cost to help you make financial decisions with confidence. Bankrate has agreements with issuers, including but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make money The products that appear on this site are from companies who pay us. This compensation can affect the way and where products are displayed on this site, including, for example, the sequence in which they appear in the listing categories and other categories, unless prohibited by law for our mortgage, home equity, and other home lending products. However, this compensation will not influence the information we provide, or the reviews appear on this website. We do not include the universe of companies or financial offers that may be open to you. SHARE Demaerre/Getty Images

3 minutes 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 enjoys writing to help people understand personal finance issues. Her writing has appeared in various companies and publications such as Finch, Toast, JBD Clothiers and The Financial Diet. The Editorial Team is composed of Rhys Subitch Editor: Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are committed to helping readers gain the confidence to manage their finances by providing clear, well-researched information that breaks down complicated topics into bite-sized pieces. The Bankrate guarantee

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If you have questions about money. Bankrate has answers. Our experts have been helping you master your money for over four decades. We strive to continuously give our customers the right advice and the tools required to be successful throughout their financial journey. Bankrate adheres to a strict code of conduct , so you can trust that our content is truthful and reliable. Our award-winning editors and journalists produce honest and reliable content that will help you make the right financial decisions. The content we create by our editorial team is factual, objective and is not influenced through our sponsors. We’re transparent about the ways we’re able to bring quality information, competitive rates and useful tools to you , by describing how we earn our money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for the placement of sponsored products or services, or when you click on certain hyperlinks on our site. This compensation could impact how, where and in what order products appear within listing categories in the event that they are not permitted by law. This is the case for our mortgage or home equity products, as well as other home lending products. Other factors, such as our own proprietary website rules and whether the product is available in the area you reside in or is within your self-selected credit score range may also influence the manner in which products appear on this website. Although we try to offer an array of offers, Bankrate does not include the details of every credit or financial item or product. The process of obtaining an auto loan is a difficult choice to make. It can affect your credit score, and can hinder your ability to obtain another loan or even open a new line of credit. Many people would prefer to avoid an . But sometimes, there’s no other alternative. Making a loan involves working with a car dealer as a liaison between the lender. They are often able to make a lump sum payment that is less the total amount of your car loan if you pay within a specific time. Before you make this choice it’s crucial to know both the advantages and disadvantages of your financial and personal goals, plus your current financial situation before deciding what to do. The decision to settle a car loan can affect your credit score. When you settle a car loan immediately, the impact of your credit rating is negative. Your but the amount it drops varies. In general, the better your score was at the beginning your score, the more it’ll decrease if you pay off your loan. But, settling your auto loan may be the best option over the long haul. Your credit score gets affected whenever you don’t make the loan payment. If you struggle to make regular payments and you aren’t able to do so , settling your auto loan will allow you to start rebuilding your credit. After the loan has been paid off, your credit score will initially go down but it is something you can concentrate on . You are able to work towards making other payments on time, pay down other debts and raise your credit score again. Opening could negatively affect your credit score, therefore you should avoid any new accounts until you’re credit score is better. A paid-off account will stay on your credit report for seven years after the date of delinquency. That may seem like a lengthy period, but keep in mind that it’s better than multiple unpaid payments piling up on your credit score. Taxes will also be imposed on the forgiven debt It’s worth noting that if you are involved in the process of negotiating an auto loan settlement that is not more then the total amount of loan itself, the creditor will typically write off the amount that is not paid. This amount is considered to be taxable income by the IRS that means that you may have to pay federal tax. You will receive a 1099-C cancellation of debt tax notice from your creditor. It will inform you of the amount you must pay tax on. Because it is taxed like income it is taxed according to the tax bracket for income you are in. The difference between a settlement of your debt and. repossession Settling your auto loan differs from . With an auto loan agreement, you sign a contract with the lender to pay a percentage of the original debt. Your debt is then considered as settled. However, you will have to pay taxes on the forgiven debt. With repossession, the lender will return the car and then sell it to pay off a portion, or even all your loan debt. If the car is sold for less than the amount of your debt, you may still have to pay the lender. This is referred to as an indeficiency settlement. You can turn in your car , and . The lender could also be able to repossess your vehicle 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 in a negative way. And, since late payments often precede both, you may have multiple negative marks in your credit history. Possessions can lower the credit rating by 100 points, or even more. The best way to protect your credit score is to pay off your outstanding debt completely, however that’s typically too big of a demand. If you’re unable to do that, try to cooperate in conjunction with your lender to find the best solution. You may want to find out what is best for your situation. 6 options for settling your car loan Pay off the loan completely. in full is always the best option for your credit. Modify your car loan. Based on your circumstances, you may be eligible to . Talk to your lender to see whether it is possible to modify the conditions of your loan. You can trade in your vehicle. If your car loan is too expensive, consider for an older car. This can result in lower monthly installments for your vehicle loan. Sell your vehicle. If you’re able to get around without a vehicle, even temporarily, you might be thinking about . Allow your car to be taken away. Vehicle repossession also negatively impacts your credit score, but it’s a better option than settling your car loan. Consult a credit advisor to find out the best choices to improve your credit. Apply for bankruptcy. If your car loan isn’t the only issue you have with your finances it’s possible to file for bankruptcy . It could affect your credit over the course of 10 to 15 years so this isn’t something you’d want to do if you have other alternatives. The bottom line Settling a car loan could be a bit daunting however, resolving your issue today will help your financial situation in the long run. Think about your options prior to settling your car loan since it will affect your credit score negatively for seven years. If you’re not sure how to proceed, think about speaking with a credit professional. Learn more

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Written by a contributing Writer Emma Woodward is a former contributor for Bankrate and a freelance writer who loves writing to help people understand personal finance issues. Her writing has appeared in businesses and publications like Finch, Toast, JBD Clothiers and The Financial Diet. Edited by Rhys Subitch Editor: Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers gain confidence to manage their finances with clear, well-researched facts that break down otherwise complicated topics into digestible pieces.

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