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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 goal is to help you make better financial decisions by providing you with interactive tools and financial calculators that provide objective and original content. We also allow users to conduct research and analyze information for no cost to 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 products that appear on this website are provided by companies that compensate us. This compensation can affect the way and where products appear on the site, such as the order in which they may appear within the listing categories, except where prohibited by law. Our loan products, such as mortgages and home equity and other home loan products. This compensation, however, does not influence the content we publish or the reviews that you see on this site. We do not contain the universe of companies or financial deals that could 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 to Bankrate and a freelance writer who is passionate about writing articles that help to simplify personal finance topics. Emma has contributed to companies and publications like Finch, Toast, JBD Clothiers and The Financial Diet. The Editorial Team is composed of Rhys Subitch and edited by 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 precise, well-researched, and well-documented information that breaks down otherwise complex topics into manageable bites. The Bankrate promise

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They ensure that what we write is objective, accurate and reliable. We have loans journalists and editors are focused on the areas that consumers are concerned about most — the various types of loans available, the best rates, the best lenders, the best ways to repay debt, and more . This means you’re able to be confident about investing your money. Editorial integrity

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If you have questions about money. Bankrate can help. Our experts have been helping you master your money for over four decades. We are constantly striving to provide consumers with the expert advice and the tools required to make it through life’s financial journey. Bankrate adheres to strict standards standard of conduct, which means that you can be sure that our information is trustworthy and reliable. Our award-winning editors, reporters and editors create honest and accurate content to help you make the right financial decisions. Our content produced by our editorial staff is objective, factual, and not influenced from our advertising. We’re open about the ways we’re able to bring quality information, competitive rates and useful tools to our customers by describing how we earn money. is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for the placement of sponsored products or services, or through you clicking specific links on our site. So, this compensation can impact how, where and when products are listed and categories, unless it is prohibited by law. This is the case for our mortgage home equity, mortgage and other products for home loans. Other elements, such as our own proprietary website rules and whether or not a product is offered in your area or at your own personal credit score could also affect the way and place products are listed on this website. We strive to provide an array of offers, Bankrate does not include information about each credit or financial products or services. Settling an auto loan is an arduous choice to make. It affects your credit score and may hinder your ability to obtain another loan or open a new line of credit. The majority of people prefer not to have this . However, sometimes there’s just no other alternative. The process of obtaining a car loan requires an agreement with a dealer who acts as a mediator between the lender. They may be able to negotiate a lump sum payment that is less than the total amount of your car loan when you pay it by a certain date. Before you make this choice it is important to consider the pros and cons of your financial and financial goals plus your current financial situation, when deciding what to do. Settling an auto loan can affect your credit score When you pay off the car loan, the immediate impact of your credit rating is negative. The amount it decreases is different. The higher your score at start, the more it will decrease if you pay off your loan. But, paying off your car loan could be your most beneficial option over the long haul. Your credit score is affected every time you miss an loan payment. If you struggle to keep up with your payments and are unable to, paying off your auto loan allows you to rebuild your credit. When the loan is settled the credit score will begin to decline however, you will be able to concentrate on . You are able to work towards making regular payments and pay off other debts and raise your credit score again. The opening of a new account could affect your credit score, therefore you may want to avoid new accounts until your credit score is better. A settled account will remain on your credit score for seven years following the initial date of delinquency. This may seem like a long period, but keep in mind that it’s preferable to multiple missed payments piling up on your record. You’ll also pay taxes on the forgiven loan It’s worth noting that if you are involved in the process of negotiating an auto loan settlement that is less than the amount of the loan it self, the creditor usually writes off the amount that is not paid. The amount you pay is considered tax-deductible income to the IRS that means that you could be required to pay federal taxes. The 1099-C cancellation tax of debt notice from your creditor. It will tell you how much you need to pay taxes on. Because this is considered income, it is taxed according to the income tax bracket that you’re in. The difference between a settlement of your debt and. repossession Getting your vehicle loan differs from . With an automobile loan agreement, you sign a contract to the lender to pay a percentage of your original debt. Your debt is then considered as settled. But, you’ll still be required to pay tax on the forgiven debt. When you are repossessed the lender will take back your vehicle and offer it for sale to pay off some (or all) of the loan credit. If the vehicle is sold for less than the amount of the debt, you could still have to pay the lender. This is called an indeficiency settlement. You can turn in your vehicle and . The lender could also be able to seize your vehicle without your consent if you are unable to pay payments on your loan payments. Both the process of settling your debts and repossessions can impact your credit score in a negative way. Also, as late payments typically precede both, you may have several negative marks on your credit history. Repossession can drop the credit rating by as much as 100 points, or even more. The best option for your credit score is to settle your credit in its entirety, however that’s often too tall of an ask. If you can’t accomplish that, then cooperate together with the lender to determine the most effective solution. It is possible to determine what would be the best option for you. 6 options for settling your car loan Make sure you pay off the loan entirely. Completely is always the best option for your credit. Modify your car loan. In the case of your particular situation you may be in a position to . Contact your lender to find out if it can help rework the conditions of your loan. Sell your car. If your car loan is too expensive you might want to consider a more recent car. This could get you a lower monthly payment for your car loan. Sell your car. If you’re able to get around without a vehicle, even temporarily, you might want to think about . You can let your car be taken over. Vehicle repossession also negatively impacts your credit, but it’s a better option than paying off your car debt. Contact a credit counselor to learn about the best alternatives regarding your credit. Apply for bankruptcy. If your car payment isn’t the only issue you have with your finances then you might be eligible to . The impact on your credit score could last in the ten years following, so it’s not something you want to take on if you have other options. The bottom line: settling an auto loan isn’t easy however, resolving your issue now can help you save money over the long term. Consider your alternatives before settling your car loan, as it will affect your credit score negatively for the next seven years. If you’re not sure which option to choose, consider talking with a credit counselor. Find out more


Written by the contributing Writer Emma Woodward is a former contributor to Bankrate and freelance writer who loves writing articles that help to simplify personal finance topics. Emma has contributed to businesses 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 passionate about helping readers gain confidence to take control of their finances with precise, well-studied details that cut otherwise complex topics into manageable bites.

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