Car Loan Default and Repossession Risks Explained

Our guide explains the risks and consequences of car loan default and repossession, the legal implications, financial impacts, and prevention strategies to help avoid the stress of car loans altogether.

Updated 17 February 2024

Summary:

The consequences of not meeting your repayment obligations are significant and cause thousands of New Zealanders endless stress every year.
We believe every borrower needs to know what could happen if they default on their loan and have published this guide to explain the fundamentals.
We explain the concept of defaulting on a car loan, outline the potential repercussions, and empower you with the knowledge to prevent and manage such situations.

Know This First: What Does Defaulting on a Car Loan Mean?

To 'default' on a car loan means failing to meet the legal obligations set out in your loan contract.
This is more than just missing a payment for a couple of days or being late a few times; it's a breach of your contractual agreement with the lender, which can trigger consequences beyond simple late fees.
You can breach the terms of your car loan agreement by missing one or more repayments, failing to maintain insurance on the vehicle, or not meeting other conditions specified in your contract.
Lenders define 'default' based on the specific terms outlined in each loan agreement, so it varies from lender to lender, but the consequences are generally the same.

Common reasons for default include:

Missed Payments: The most common reason for defaulting is failing to make the scheduled loan repayments. Whether due to financial hardship, oversight, or other reasons, missed payments can quickly escalate into a default situation.
Breach of Contract Terms: Apart from missed payments, other actions, such as failing to keep the vehicle insured, not maintaining it to an agreed standard, or even selling the car without the lender's permission, can constitute a breach of contract, leading to default.
Financial Hardship (and inability to make repayments): Unexpected life events like job loss, illness, or significant unplanned expenses can lead to financial hardship, making it challenging for borrowers to meet their repayment obligations. Our guide to hardship has more information.
Insolvency or Bankruptcy: In more severe cases, if a borrower becomes insolvent or declares bankruptcy, this can lead to a default on the car loan.

Remember: Timely repayments are crucial, but they're just one aspect of car loan obligations. The following sections in our guide detail the potential consequences of defaulting and offer guidance on key factors to consider in your car loan contract, helping you avoid unnecessary costs and stress.

The Consequences of Defaulting on a Car Loan

Understanding the repercussions of defaulting on a car loan is crucial for every borrower - generally, they're serious and can cause months or even years of financial problems. For this reason, it's best to never default for any reason unless you have no other option.

When you sign a car loan agreement, you commit to legal and financial responsibilities. Failing to meet these can lead to serious consequences beyond your immediate finances. We outline the outcomes of a loan default, helping you comprehend all the possible implications and the importance of keeping up to date with your car loan repayments.

1. Increased Fees and Penalties:

When you default on a car loan, the first and most immediate consequence is usually additional fees and penalties being added to your loan balance.
Car lenders, acting per the contract you've signed, keep charging fees and interest while you're in default. This means you'll have late payment fees and higher interest rates applied to the outstanding balance.
For example, if you miss a payment, you might incur a late fee of $50, and your interest rate could jump up 5% or even 10% for the time you're behind in payments, increasing your overall loan cost.

2. Impact on Credit Profile and Future Borrowing Capability:

A default can significantly damage your credit profile as the car lender will share non-payment information with credit reporting agencies.
A car loan default can stay on your record for several years, affecting your ability to borrow in the future.
A troubled credit history can result in higher interest rates on future loans or even outright denial of credit, which is a problem already for many thousands of New Zealanders.

3. Legal Implications and the Repossession of the Vehicle:

In severe cases, defaulting on your car loan can lead to legal action, including the repossession of your vehicle.
Lenders have the right to take the car as the loan is secured, and the car serves as collateral for the loan.
Car lenders can be aggressive and move fast to get your car in their hands. And once successful, you're left without transportation, so you can't get to and from work. In many cases there is still money to pay on loan even after it's sold by the lender.

4. Consequences of an Immobiliser:

In some cases, lenders may install an immobiliser on the vehicle, which can be activated in the event of a default.
Certain car lenders commonly use this device to prevent the car from being started or used, meaning you can't drive it until payments are up to date.
This Fair Go story from March 2023 explains the serious issues that immobilisers cause, and why we argue they should be banned given the safety risks and their general oppressive nature.
While the use of an immobiliser is a less severe measure than repossession, it still has significant implications for mobility and daily life.

Know This: A typical example of the aftermath of defaulting on a car loan:

Sarah took out a car loan but lost her job and missed two payments. Not only did she incur additional fees, but her credit history was affected.
This made it difficult for her to refinance her loan and affected her ability to move rental properties as she was seen as a higher-risk tenant.
In summary, not paying a car loan and having it repossessed has significant flow-on effects.

The Trap of Repossession and Remaining in Debt

When you default on a car loan, one of the most severe consequences is the repossession of your vehicle. However, many borrowers are surprised to learn they can still owe a significant amount even after the lender takes back their car. This is an unpleasant aftershock when your car is taken away and causes many New Zealanders to further struggle with their finances.

The debt borrowers owe arises from the difference between the remaining loan balance and the value the lender recovers from selling the repossessed vehicle.

This problem is best explained with an example. Our example of John's situation hepls to explain the risks and costs:

Original Loan Amount: John took out a car loan for $20,000 to purchase a new car.
Paid to Date: Over 18 months, he paid $8,000 towards the loan. His remaining balance is $12,000.
Default and Repossession: John defaults on his loan due to financial difficulties. The lender repossesses the car.
Sale of Repossessed Car: The lender sells the repossessed car at auction for $7,000.
Outstanding Debt Post-Sale: John still owes $5,000 to the lender after the sale. This is because the sale of the car ($7,000) didn't cover the remaining balance of his loan ($12,000).

Additional Costs:

Repossession Costs: The lender charges John $1,000 for the repossession process.
Late Fees and Additional Interest: John had accrued $500 in late fees and extra interest charges during his default period.

Total Debt After Repossession:

Remaining Loan Balance: $5,000
Repossession Costs: $1,000
Late Fees and Additional Interest: $500
Total Debt Owed Post-Repossession: $6,500

Know This: This example shows how John, despite losing his car, now owes $6,500 even after repossession. It highlights the critical importance of understanding the full implications of a car loan contract, particularly the potential financial consequences of defaulting.

Features of a Good vs a Bad Car Loan Contract Regarding Default Consequences:

Generally, good contract features with fair default terms include:

Clear Explanation of Default Terms: A good contract will clearly define what constitutes a default and the subsequent steps. It ensures transparency and helps borrowers understand their obligations.
Reasonable Grace Periods: For example, a grace period of 10 or 15 days after a missed payment before any penalty is applied. This allows borrowers some leeway to rectify their situation and get up to date without being hit with fees and penalty interest alongside threats and vehicle immobilisation.
Flexible Rectification Options: This can include restructuring the loan or seeking temporary relief, which can be invaluable during unforeseen financial hardships.

Bad contract features can include:

Harsh Penalties: Exorbitant fees or steep interest rate hikes immediately following a single missed payment are red flags. They can exacerbate the borrower's financial strain, given they're already under pressure from missing a payment.
Immediate Repossession Policies: Contracts that allow for the repossession of the vehicle soon after a missed payment, without giving the borrower a chance to catch up, are extremely punitive.
Inflexible Terms for Rectification: A lack of options for modifying the loan terms in case of financial difficulties (outside of hardship applications, which are a legal requirement, shows a lack of consideration for the borrower's circumstances.

Example of a Bad Contract Scenario:

Mark signs a car loan with a contract with a clause allowing immediate repossession after just one missed payment.
When Mark encounters a medical emergency and misses a payment, he faces the immediate risk of losing his vehicle, causing further distress in an already challenging time, with little options beyond a hardship application.

Protecting Yourself From Default Before and After Signing a Car Loan

There are many steps to take before signing a car loan that can protect you from being at risk of losing your car. We outline these in detail:

1. Read and Understand Default Terms:

Take the time to read and comprehend all default-related terms thoroughly. This includes understanding the timeline of default processes, potential fees, and the lender's rights in case of default.
Many New Zealanders don't read their car loan contract, and bad players exist to exploit people. This case from July 2020 explains how hundreds of Aucklanders signed contracts with illegal repossession terms.

2. Seek Clarification:

Prepare a list of questions or concerns and discuss them with the lender. Ensure that you receive clear and complete answers that you understand.
Don't be pressured into signing the contract until you are satisfied with the explanations provided. There is no rush and good lenders don't apply pressure.

3. Review the Contract with a Financial Expert:

Before signing, we suggest you get the contract reviewed by an experienced third party.
The Community Law Centre, MoneyTalks NZ (financial counselling) and the Citizens Advice Bureau have team members familiar withcar loans.
Google the name of the lender - does it have a good reputation? Are there complaints about its behaviour?

Once you've signed a contract and bought a car, there are many preemptive steps you can take to keep your finances healthy, avoid a default and reduce the typical car loan repayment stress borrowers experience. Our suggestions to do this include:

1. Budget and Know Where Your Money Is at ALL TIMES:

Download a budget app and prioritise your car loan payments. Budget apps track your spending habits, adjust your expenses accordingly which is incredibly useful when setting aside money to make car repayments.
Include a category for car-related expenses, such as maintenance and insurance, along with your loan repayment. Anything to do with cars can eat up a lot of your payday so being prepared is essential.

2. Talk to Your Lender if You're at Risk of Defaulting:

Don't shy away from talking to your lender - too many New Zealanders avoid communicating with them, and that causes more problems. This means replying to their texts and emails and answering when they ring.
Please don't run away from dealing with an issue, as it only worsens your situation and risks the repossession of your car.
Inform the lender proactively if you think you'll have problems making payments, and discuss potential solutions like payment deferment or adjustments to the payment schedule. Our hardship guide explains more.

3. Set up Automatic Payments:

Arrange for automatic payments to be sent to your car lender. This ensures on-time payments and minimises the risk of being overdrawn or having payments bounce.
Double-check your account balance regularly to ensure sufficient funds cover the automatic withdrawal.

4. Establish an Emergency Fund:

While it may seem unrealistic, aiming to build an emergency fund of around $2,000 to cover your car loan payments for several weeks will make a difference if you achieve it. This guide explains more.
Start small if necessary and gradually increase your savings. Even a small emergency fund can be a buffer against unexpected financial shocks.

What are My Rights During a Car Repossession?

If you run out of options and your car is going to be taken by your lender, New Zealand has strict laws and the repossession of a vehicle due to car loan default is governed by regulations that protect both the lender and the borrower. As a borrower, you have several rights during the repossession process:

Right to Notice: Lenders are required to provide you with sufficient notice before they can repossess your vehicle. This notice should inform you of the default and allow you to rectify the situation by paying the amount owed.
Right to Clear Communication: Lenders must communicate the reasons for repossession and the amount owed to prevent repossession. They should provide a breakdown of the overdue amount, including any additional charges or fees.
Protection of Personal Property: During repossession, items not part of the vehicle purchase (personal belongings) should be returned to you. If you find that personal items have been taken with the car, contact the lender immediately to arrange their return.
Conduct of Repossession Agents: Agents must conduct themselves professionally and adhere to legal standards. They are not allowed to use force or intimidation during the repossession process. If you believe the repossession agent has acted inappropriately, you can file a complaint with the lender.
Right to Redeem the Vehicle: Even after repossession, you usually have a window of time to redeem the vehicle by paying the overdue amount plus any repossession costs. This right and the specific terms should be outlined in your loan agreement.
Fair Sale Process: If the car is to be sold after repossession, you have the right to a fair and reasonable sale process. The lender should attempt to get a fair market value for the vehicle to reduce your deficiency balance (if any).
Dispute Resolution: If you disagree with the repossession or the amounts claimed by the lender, you have the right to challenge it. Each lender must have an internal dispute resolution process, and you can also access external dispute resolution schemes, as outlined in our complaints guide.

Frequently Asked Questions

What happens if I just miss one car loan payment?

Missing even one payment can trigger late fees and affect your credit profile. Most lenders have a grace period, but if you exceed it, the missed payment is reported to credit agencies. It's best to contact your lender immediately to discuss your situation and check your car loan contract to see the terms for missed payments.

Can I renegotiate my car loan terms if I'm struggling to keep up with repayments?

Yes, it's possible - lenders often prefer renegotiating terms rather than dealing with defaults. This can include extending the loan term and reducing or temporarily pausing payments. It's best to communicate openly with your lender about any hardship. You may be eligible for a hardship variation under the CCCFA, which can adjust your loan terms to make repayments more manageable.

What's the typical grace period for a car loan payment?

Grace periods vary by lender but typically range from 5 to 15 days under most car loan contracts in New Zealand. You may not incur additional fees for late payment during this time, but it's essential to confirm this with your specific lender or check your contract.

What should I do if I receive a repossession notice?

Act quickly. Contact your lender to discuss options or seek advice from a budgeting advisor. In most cases, paying the overdue amount can stop the repossession process, but this can be a significant expense.

Can I still owe money after my car is repossessed and sold?

Yes, if the sale of your repossessed car doesn't cover the outstanding loan balance and associated costs (like repossession fees), you'll owe the remaining amount. This is known as a "deficiency balance" and the lender has the legal right to chase you for it.

How does an immobiliser impact my default situation?

If your car is fitted with an immobiliser, the lender can disable your vehicle, making it unusable. This is a less severe measure than repossession but can significantly disrupt your life.

How can I avoid defaulting on my car loan in the future?

Maintain a robust budget, set up automatic payments, and build up an emergency fund. Regularly review your financial situation and contact your lender if your circumstances change.