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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 providing you with financial calculators and interactive tools, publishing original and objective content. This allows users to conduct research and analyze information for no cost to help you make informed financial decisions. Bankrate has partnerships with issuers such as, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make money The products that appear on this site come from companies that pay us. This compensation could affect how and where products appear on the site, such as, for example, the order in which they may appear within the listing categories, except where prohibited by law for our loan products, such as mortgages and home equity and other home loan products. This compensation, however, does affect the information we publish, or the reviews you read on this site. We do not include the entire universe of businesses or financial offers that may be open to you. SHARE: demaerre/Getty Images

3 min read published September 19 2022

Emma Woodward Emma Woodward Written by Contributing writer Emma Woodward is a former contributor for Bankrate and a freelance writer who is passionate about writing to demystify personal finance topics. She has written for various companies and publications like Finch, Toast, JBD Clothiers and The Financial Diet. Edited by 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 control their finances through providing concise, well-researched and well-studied information that breaks down complex topics into manageable bites. The Bankrate promises

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If you have questions about money. Bankrate has the answers. Our experts have been helping you master your money for over four years. We are constantly striving to provide consumers with the expert guidance and the tools necessary to succeed throughout life’s financial journey. Bankrate adheres to strict standards standard of conduct, which means that you can be sure that our content is truthful and reliable. Our award-winning editors, reporters and editors provide honest and trustworthy content that will help you make the best financial decisions. The content created by our editorial staff is factual, objective and uninfluenced by our advertisers. We’re transparent regarding how we’re in a position to provide quality content, competitive rates and practical tools for our customers by describing how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated for placement of sponsored products andservices or by you clicking on specific links on our site. Therefore, this compensation may influence the manner, place and in what order products appear in listing categories, except where prohibited by law. This is the case for our mortgage, home equity and other home lending products. Other elements, such as our own proprietary website rules and whether the product is available within your area or at your personal credit score could also affect how and where products appear on this site. Although we try to offer the most diverse selection of products, Bankrate does not include details about every credit or financial products or services. The process of obtaining a car loan is a difficult decision to take. It can affect your credit score and could affect your chances of getting another loan or to open a new line of credit. The majority of people prefer not to have this . However, in some cases, there’s no other alternative. Settling a car loan involves working with a car dealer as a liaison between you and the lender. They are often able to negotiate a lump sum payment that is less the full car loan if you pay by a certain date. Before making this decision it is important to consider the pros and cons of your and financial goals, plus your current financial situation when you decide what to do. The decision to settle a car loan will lower your credit score When you pay off the car loan and it is settled, the immediate effect to your credit scores is negative. The amount it decreases varies. Generally, the higher your score at start your score, the more it’ll go down if you settle your loan. But, paying off your car loan could be your best option for the long run. Your credit score is negatively affected whenever you don’t make the loan payment. If you’re struggling to keep up with your payments and are unable to, paying off your auto loan can allow you to rebuild your credit. When the loan is paid off and your credit score is restored, it may initially drop — but you can concentrate on . You are able to work towards making regular payments, pay down other debts and raise your credit score again. Opening could negatively affect your credit, so you should avoid opening new accounts until your credit score is in better shape. A settled account will remain on your credit report for seven years after the date of delinquency. It may seem like a lengthy period, but keep in mind that it is 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 receive an automobile loan settlement that is not more then the total amount of loan itself, the creditor usually will write off the amount that is not paid. The amount you pay is considered tax-deductible income to the IRS, which means you may have to pay federal taxes. You should receive a 1099-C cancellation tax of debt notice from the creditor. It will tell you how much you need to pay taxes on. Since it is taxed like income, it will be taxed at the income tax bracket that you’re in. Settlement of debt vs. repossession The process of settling your auto loan differs from . In an automobile loan resolution, you agree with the lender to pay a portion of your original debt. Your debt will then be considered as settled. However, you will be required to pay tax on the forgiven debt. In the event of repossession, the lender will take back your car and sell it to pay off a portion (or all) of the loan credit. If the car is sold for less than the amount of your loan, you might owe money to the lender. This is known as the deficiency payment. You can turn in your car , and . The lender could also have the right to seize your vehicle without your consent if you fail to make payments on your loan payments. Both car debt settlement and repossession can affect 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 even more. The best option for your credit score is to pay off the credit in its entirety, however that’s usually too much of a demand. If you’re not able to accomplish that, then collaborate together with the lender to determine the most effective solution. You might want consider what’s best for your situation. Six options to settle your car loan Pay off the loan entirely. in full is always the best option for credit. Modify your car loan. Depending on your situation you might be able to . Talk to your lender to see whether it is possible to modify the terms of your loan. Sell your vehicle. If your car loan isn’t affordable look into buying an older vehicle. This may result in a lower monthly payment for your car loan. Sell your vehicle. If you’re able to get around without a car for a short time, you might consider . You can let your car be taken over. Vehicle repossession also negatively impacts your credit score, however it’s better than settling your car loan. Consult a credit advisor to determine the most effective alternatives to improve your credit. Make an application for bankruptcy. If your car payment isn’t your only financial issue then you might be eligible to . It could affect your credit in the ten years following, so it’s not something you want to do if there are other options. The bottom line Settling an auto loan can be intimidating, but improving your situation now can help you save money over the long term. Consider your alternatives before settling your car loan since it will affect your credit score negatively for seven years. If you aren’t sure what to do, think about consulting with a credit advisor. Find out more

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Written by the contributing Writer Emma Woodward is a former contributor to Bankrate and a freelance writer who enjoys writing to demystify personal finance topics. She has written for various companies and publications like Finch, Toast, JBD Clothiers and The Financial Diet. Written 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 with clear, well-researched facts that break down otherwise complex topics into manageable bites.

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