Buying A Car On Credit And Then Defaulting

What happens when you a car on credit and then default on the credit card?

One of our readers, David, had this question:

What if I a 4k car with 1k down (total 5k) on a credit card and then make the minimum payments for a few months before I “can’t” afford them. What happens?

David

David,

If you finance a $4,000 car on credit and then default on the payments, it will ruin your credit. Let’s take a closer look at the situation though.

What happens when you default on a credit card?

Defaulting on a credit card sets a specific path in motion:

1. The credit card company will begin collection activities – This begins with calling your house, and calling you at work or on your cell phone. If you refuse to speak with them, or continue not making payments, you move on to step two.
2. Collection Activities become more persistent – You will get several letters in the mail. If you refuse to speak to your credit card company at all, or tell them they have the wrong phone number, your account will go to what is known as “Skip – Trace”. The skip trace divisions of credit card companies exist to track you down. This means that they will literally call everyone in the phone book who shares the same last name as you do, among other things.
3. Your debt will be sold – After refusing to make payments over several months, and having no contact with you, the bank will most likely cut it’s loss and sell your debt to a debt collection company. Or they will outsource it, and collect a percentage of anything the company manages to get form you.
4. If you refuse to speak to the professional collection company (and they will use even more aggressive and rude contact methods) then the collection company will usually seek a judgment.
5. You will have to go to court and settle your debt, or your wages will be garnished.
6. The only way the debt will disappear after this point is if you either pay it, or declare bankruptcy.

So, that’s the bad route. At every step along that path you will have the opportunity to make a payment arrangement and take care of the debt.

Alternately, If you were to put $1,000 down, finance $4,000, and make the payments for a few months, you could:

1. After making your payments for several months, contact a debt negotiation agency. This agency will represent you to the credit card company, and negotiate to decrease the amount of your debt drastically.
2. In order for the debt negotiation company to do this properly, they may make late payments in order to reduce the total amount of your debt. (Not all companies do this, but some do). It means that you will have late payment records on your credit report. You can challenge those late payment marks later, but there is no guarantee that you can have them removed.
3. The debt negotiation agency will have to close your credit card account in order to negotiate and reduce your debt.
4. You will also need to be prepared to make a larger, one – time lump sum payment. If the debt negotiation company can negotiate the debt down to around 33 cents on the dollar, then that is the payment you will have to be prepared to make in order to get the settlement.
5. Debt negotiation companies can help anyone reduce their debt, even those that probably can afford the payments. However, this method does damage your credit score. You will have to decide whether or not several late payments, a closed credit account, and a record of a settlement on your credit report is worth reducing the $4,000 debt of the car down to around. $1,320.

Aside from the obvious ethical factor, you will be paying more in interest on new loans for years (because of your ruined credit), completely negating any reduction in the price of the car over the long haul.