What Is a Charge-Off on a Car Loan?

by Neil Kokemuller

A charge-off on a car loan means the lender has written off your balance as a bad debt. The lender does so because it doesn't believe that you will repay the balance. A charge-off doesn't eliminate your obligation to pay, but it does typically lead to repossession and a negative effect on your credit score.

Charge-Off Basics

A lender normally only charges off the balance on a car loan when you fail to make payments for several months. The lender communicates the consequences for failure to pay in writing. By writing off the debt, the lender is able to minimize taxes by subtracting the bad debt amount from revenue. **Lenders still charge interest on your remaining balance**, and your obligation to repay the debt doesn't go away.

Negative Consequences

A charge-off often leads to the bad debt being turned over to a collections agency. Repossession is also common, and the lender may sell the vehicle to collect some portion of the loss. The "charge-off amount" is the difference between the sale price and what you owed on the debt. After a sale, you still owe the difference. Plus, your credit rating is significantly impacted, which hurts your ability to borrow for another car in the future.

About the Author

Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.

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