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In many states, you’re theoretically in danger of losing your vehicle after just one missed car payment. But in reality, repossession usually takes longer, with the exact process depending on your lender and your state’s repossession laws.

Your lender has the right to repossess your car as a way to recoup some of their losses should you fail to pay back your loan. When you take out a car loan, you make a promise that you’ll repay the loan in regular installments with interest. Because your lender is taking a risk by extending credit to you, they use your car as collateral.

Here’s a look at how the repossession process works, how long before a car is repossessed, and whether you can head it off by making your missed payments.

What Is Repossession?

A repossession is the seizure of property that is used as collateral for a debt, usually due to nonpayment. The lender can seize anything of value used to secure a debt. Your car is one such item that a lender can take to pay down a delinquent auto loan. Another example is a house going into foreclosure if an individual fails to pay their mortgage.

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How Does Car Repossession Work?

In an ideal world, you would make your auto loan payments on time and in full every month.

This not only helps you avoid car repossession, but it helps your credit score, which can make securing future credit easier and cheaper.

However, if you do miss a payment, you first may owe late fees, and your missed payment may get reported to the credit reporting bureaus. This can have a negative impact on your credit score.

It’s cheaper and easier for lenders if you continue making auto payments yourself, so they’ll likely try everything they can to get you to pay. They may give you up to three months to put your finances in order and make up missed payments, though the length of this period will vary by lender.

Once you’ve missed a certain number of payments, your lender will declare that you’ve defaulted on the car loan. They may use a third-party company, known as an auto recovery service, to help them track down the vehicle. When the company finds your car, they’ll send a repossession agent, who will tow the car away when it’s unattended. The lender can take the car at any time and without notice once it is in default. They can even go on to private property to take it.

At this point, your lender will likely decide to sell the vehicle, usually at public auction. If they do, they have to let you know when that will happen, so that you can attend the sale and bid on the car if you’d like.

You may have the option to reinstate the loan after repossession. You also may be entitled to buy back the vehicle, either by purchasing it at the repossession sale or by paying off the entire amount you owe, including back payments and costs related to the repossession of the car, like towing and storing the vehicle.

Once your lender sells the car, you may not be off the hook just yet. Often lenders are unable to sell the vehicle for enough money to pay off the loan. Say you owed $12,000 on your vehicle, and your lender was only able to sell it for $8,000. The difference between these amounts — $4,000 — is known as the deficiency. You may have to pay that amount before you can close the book on the repossession, regardless of whether it’s an involuntary or voluntary repossession.

Recommended: Subprime Auto Loans

Are Missed Car Payments the Only Reason for Repossessions?

Missed auto loan payments aren’t the only reason your car may get repossessed. Missed car insurance payments, for example, may be another reason. Pay careful attention to your loan contract to ensure you know what steps will trigger a repossession.

How Long Before Your Car Gets Repossessed?

The amount of time you have before the repossession process starts is typically up to the lender. The best place to find how long before a car is repossessed is in your loan documents. In these documents, you’ll find the length of your grace period, which is the amount of time you have to make a loan payment without triggering late fees or going into default.

Laws on when you’ve entered default vary from state to state. But in many states, the law allows repossession proceedings to start just one day after you miss a payment. However, most lenders will give you 90 days before they start repossession.

Recommended: How Car Loan Refinancing Works

Does Your Car Get Repossessed After Making the Missed Payments?

Lenders typically don’t have to warn you that they’re going to repossess your car. You may not know it’s coming, and as a result, you may not have time to plan for it.

Your best bet if you want to avoid repossession is to make your missed payments as quickly as possible. If you know you’re going to have trouble making your payments, contact your lender as soon as you can to explain your situation. As we’ve mentioned, they likely see repossession as a last resort on their part, so they may do what they can to help you pay off your loan.

Go into the conversation knowing how much you can afford to pay and when you’re likely able to pay it. Your lender may work with you to offer solutions, such as loan deferment, which allows you to put off payment until you’re financially stable again.

You also may talk to your lender about refinancing your loan to make it more manageable. When you refinance, you take out a new loan to pay off your old one. The new loan will hopefully have a lower interest rate or a longer term that should help lower your monthly payments.

Just keep in mind that while a lower monthly payment may be easier to budget for and make on time, a longer term means you’ll end up making interest payments for longer. This can ultimately increase the cost of your loan in the long run.

The Takeaway

Car repossession can leave you without vital transportation, and it can harm your credit score. You can avoid repossession by always making payments on time. And if you find yourself unable to pay, work with your lender to see how they can help. It’s better to be proactive than to sit around worrying about how many car payments you can miss before repo.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

How many car payments can you miss before your car is repossessed?

The number of car payments you can miss before repo will vary by lender. In some cases, it may be only one. However, lenders will often allow you 90 days — or three months’ worth of missed payments — before they start repossession proceedings.

If you repay missed payments, will your car be repossessed?

If you repay missed payments, your car is less likely to be repossessed, but it depends on your lender’s policies. Communicate with the lender to negotiate repayment terms and confirm your account is current. Timely action can prevent repossession and protect your credit score from further damage

How long does it take a repossession to be processed?

The repossession process timeline varies but typically starts after 30 to 90 days of missed payments, depending on the lender and state laws. Once initiated, repossession can occur within a few days to weeks. Lenders usually notify you, but in some states, they can repossess the vehicle without warning.

Photo credit: iStock/onuma Inthapong

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOALR-Q325-073

Traveling in an RV (recreational vehicle) is a great way to see the country. It allows you to stop wherever and whenever you like, and you never have to search for a hotel room or a restaurant.

While there are many advantages to owning an RV, it can be expensive. If you bought your RV with a loan and you want to save on the interest you’re paying or lower your monthly payment, RV refinancing may be a great option for you.

Here’s everything to know about RV refinancing — including terms, interest rates, costs, and how to find the best deal.

How Does RV Refinancing Work?

Just like there are various types of car loans, there are different types of RV loans, including RV auto loan refinancing.

When you refinance an RV loan, you’re taking out a second loan to pay off the first loan. Ideally, the second loan will have lower interest so you can save money over the term of the new loan. Alternatively, you could extend the repayment period of the new loan to lower your monthly payments. Keep in mind, though, that extending your term increases the amount you’ll pay in interest over the life of the loan.

You make monthly payments on the refinanced loan until it’s paid off. However, if you are unable to make the payments, your RV could be taken by the lender since it is collateral for the loan.

RV Refinancing Terms

If you’re interested in an RV loan refinance because you want to lower your monthly payment, you can look for a loan with extended terms. Some RV refinancing terms can be as long as 20 years, especially if you’re refinancing a loan of $50,000 or more.

You can find RV refinance loans for as little as $5,000 and as much as $100,000 with low rates. Be aware you may be required to pay a processing fee for the RV loan.

Recommended: How to Shop for Car Loans

RV Refinancing Interest Rates

RV loan refinance interest rates depend on several things, including the lender you use and your creditworthiness. If you have great credit, you’ll likely be able to get a lower interest rate. If you have bad credit, your rate may be higher.

Check out this guide to auto loan terms explained to learn more about loan terms and interest rates for vehicles.

RV Refinancing Credit Score

Similar to car loan requirements, there are criteria to qualify for RV refinancing, including your credit score. Some lenders may require credit scores as high as 680. Others might not lend to you if you have a bankruptcy on your record or bad credit. Still, other lenders may lend to you with bad credit, but you’ll pay a higher interest rate.

RV Refinancing Costs

In addition to the interest you’ll pay on a refinancing loan, there may be other fees involved. These include administration fees and origination fees. There may also be a flat rate or a percentage of the loan value fee, too.

Recommended: Average Car Loan Interest Rate by Credit Score

RV Refinancing Tips

Financing an RV, or refinancing one, is a lot like applying for an auto loan. Here are tips for finding a deal that can save you money.

Weighing Your Options

Start by shopping around for the best rate you can qualify for. Often, you can get preapproved with many lenders and your credit score will only take one hit.

You can start with your bank to refinance your RV loan and look into online lenders, which may be more flexible in their criteria to qualify for refinancing. Also, check with the company you have your current RV loan with to see what refinancing options they offer.

If you want a lower monthly payment, shop for a loan that offers a longer repayment period. Just be aware that you may pay more in interest over the life of the loan with a longer term.

Recommended: Guide to Car Depreciation

Knowing Your Budget

Just like with auto loan shopping, you need to understand your budget when refinancing an RV. Start your loan search by knowing what you’re paying for your existing RV loan, including interest rate and monthly payment. If you want a lower interest rate, only consider loans that offer less than what you’re paying. If you prefer to lower your monthly payment, look for a longer loan term than the one you currently have.

Getting a Deal

RV loans may vary wildly in their interest rate and terms, so spend plenty of time exploring the options. If you have questions, call and speak to the lender. In addition to saving money, you also want to work with a lender who is responsive, available, and demonstrates excellent customer service.

Recommended: How Soon Can You Refinance After Purchase?

RV Refinancing Benefits

Refinancing RV vehicles offers perks. The first is that you may be able to refinance the loan at a lower rate than you are currently paying. Interest rates fluctuate over time, as can your financial situation. For instance, your credit score may be higher now than it was when you got your first RV loan, and you may qualify for a lower interest rate.

A second benefit is reducing your monthly payment. If your first RV loan payment is weighing you down, refinancing could let you extend the number of years you have to repay the loan, which will lower your monthly payment. Keep in mind, though, that you’ll pay more in interest over the life of the loan if you extend it.

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Explore Refinancing Options

Refinancing an RV will take a little time and research as you investigate your options, but it can be well worth it by saving you money on interest or lowering your monthly payment.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

Is there financing available for RVs?

Yes, there are loans specifically designed for people who are buying RVs. Just be aware that the RV serves as the collateral for the loan. If you can’t pay off the loan, the lender can repossess the RV.

What credit score is required for RV financing?

The credit score needed for RV refinancing varies by lender. Some lenders require scores as high as 680. Others will work with you if you have bad credit, but they may charge you a higher interest rate for the loan.

How long should I wait to refinance my RV?

Generally, you should wait 6-12 months to refinance your RV, giving time for improved credit, interest rate changes, or increased equity. Refinancing sooner may not yield significant savings and could involve additional fees. Waiting also allows for a payment history that makes you a stronger refinancing candidate.

Photo credit: iStock/GoodLifeStudio

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOALR-Q325-072

When applying for an auto loan, understanding the requirements can streamline the process and improve your chances of approval. Lenders typically consider several factors, including your credit score, income, and employment history, to assess your ability to repay the loan.

Lenders also may require proof of insurance and a down payment. Meeting these requirements not only helps in obtaining the loan but also in getting better interest rates, making your car purchase more affordable in the long run.

Keep reading for an overview of car loan requirements needed when shopping for an auto loan, along with tips on getting approved.

Credit Score Requirements for Auto Loans

The credit score needed for car loan financing can be any score on the scale of 300 to 850. Some lenders may offer subprime auto loans, but these risky products are more commonly associated with independent finance companies and buy here, pay here (BHPH) dealerships.

The below table compares which types of lenders may approve auto loans for different credit risk categories:

What Documents May Be Required for a Car Loan?

In general, expect lenders to require the following documents:

•  Proof of identity

•  Proof of income

•  Proof of residence

•  Vehicle documentation

•  Proof of insurance

Lenders will also likely have credit score parameters, as well as standards for what’s required in a down payment. While there’s no set credit score you’ll need to get an auto loan, borrowers with good or excellent scores (in the mid 600s and up) tend to have an easier time obtaining a loan and securing better rates.

Auto Loan Requirements: Proof of Identity

A requirement for a car loan you’ll need to meet is providing proof of identity. These are the types of documentation lenders will likely accept to confirm that you are who you say you are:

•  Government-issued IDs

•  Passport

•  Birth certificate

Auto Loan Income Requirements: Proof of Income

As part of the requirements for getting a car loan, a lender will typically require you to prove how much income you earn to ensure that you make enough to qualify for the loan. While there’s no required income to get a car loan, a pretax monthly income of at least $1,500 to $2,500 can serve as a general guideline.

Ways to prove your income include providing the following:

•  Pay stubs

•  Bank statements

•  Wages and tax statements

Note that no income verification auto loans do exist, but you’ll typically be required to have a cosigner or put up collateral to secure the loan.

Requirements for Getting a Car Loan: Credit History

Credit score requirements for auto loans can vary by lender — and it’s generally true that the higher the score, the better the chance that you’ll get a good interest rate with favorable terms. Overall, a lender wants to see that you’ve handled your debt well in the past because that’s a good predictor of how you’ll manage it going forward.

If your credit score isn’t quite where you’d like it to be, be prepared to share with the lender how and why it happened, along with your plan for making your car payments on time in the future. Sometimes, a lender will require you to get a cosigner with good credit before approving the loan.

Recommended: Guide to Finance Charges on Car Loans

Auto Loan Requirements: Proof of Residence

Lenders will want to verify where you live, and there are numerous methods they might find acceptable, including:

•  Utility bills

•  Government-issued IDs

•  Property tax bills

Vehicle Information

When buying a car, your lender of choice will need information about the vehicle, including the purchase agreement from a dealer or person. Key pieces of information within the document will include the price; the make, model, and year of the vehicle; and its vehicle identification information (VIN), among other things.

Current Vehicle Registration

A vehicle must be registered in the name of the current owner for it to be legally driven on public roads. If you buy a car from a dealer, new or used, they usually provide you with at least a temporary registration; other times, they’ll handle the whole process. If not, you’ll need to check with your local Department of Motor Vehicles (DMV) to see how to transfer the registration into your name.

Requirements for Auto Loan: Proof of Insurance

Your lender will want to see that you’re able to get insurance coverage on the vehicle you’re buying. What’s required can vary, based on the state in which you live and the specific requirements of the financial institution. In general, however, you’ll need to have car insurance on your new ride before you can drive it out of the dealership lot.

Proof of insurance can include:

•  Insurance ID cards

•  Coverage letters

•  SR-22 form

Method of Down Payment

As part of a lender’s car loan requirements, you may need to make a minimum down payment. This can include a combination of cash that you’ll put down and the trade-in value of a vehicle that you’ll turn over to the dealership.

How much of a car down payment should you make? The traditional answer has been 20%, but not everyone puts down that much. To answer this question for yourself, find out what a lender requires and also consider your finances and how they may change over the next several years (meaning, over the term of the car loan).

Recommended: Grace Period for Car Payments

Auto Loan Refinance: Documents Required

With an auto loan refinance, a lender will typically want the same information that was needed for the original loan, along with information about your current loan, including the lender and outstanding balance. That said, check with your lender of choice to make sure that you have all of the documentation required.

Keep in mind that refinancing for a lower monthly payment may extend your term, and extending your term can saddle you with more interest charges over the life of your loan. An auto loan refinance calculator can help you see whether a refinanced loan offer may increase or decrease your total interest costs.

Lenders can implement their own requirements for auto loan refinancing, too, and some lenders may even offer low credit score car loan refinancing.

4 Tips for Auto Loan Approval

Getting approved for a car loan can be challenging, particularly if you have bad credit. There’s no guaranteed path for how to get approved for a car loan, but these four tips may help:

1. Choose a Budget

You may choose a budget that works for you when seeking auto loan financing. This can include identifying a target purchase price for a new or used car and sticking to the budget.

2. Have Steady Income

Having steady income from salaries, wages, or any other source can help you get approved for a car loan. Lenders may assess your debt-to-income ratio when deciding whether to approve or deny your loan application.

3. Buy a Newer Car

Buying a newer car may help you get approved for financing as opposed to buying an older vehicle. Some lenders, for example, may deny financing a 10-year-old car or a vehicle with more than 100,000 miles on the odometer.

4. Make a Larger Down Payment

A larger down payment may prevent you from getting an upside down auto loan in which your loan balance is greater than your car’s resale value. It’s generally better to have positive equity in your car rather than negative equity that leaves you underwater. A larger down payment can minimize your borrowing expenses and monthly car loan payment, which lenders may take into account when making financing decisions.

Recommended: Guide to Financing a Car Out of State

More Auto Loan Refinancing Tips

Auto loan requirements can vary by lender, but most will want to see verification of your identity, income, residence, and auto insurance, along with additional information about your financial situation, your credit history, and the vehicle being purchased.

When refinancing a car, similar information is typically needed, along with details about the outstanding loan on the vehicle. It can be wise to pull these documents together as you start the process to make things move ahead more quickly and smoothly.

The Takeaway

Applying for and getting approved for an auto loan can involve several steps, including knowing your credit score and other financial details and being able to provide such documents as proof of identity, proof of income, proof of residence, vehicle documentation, and proof of insurance. As you gather these materials, you’ll also want to shop around for the most favorable rates and terms you can secure.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

What is required to get approved for a car loan?

Requirements for car loans may vary from lender to lender, but borrowers generally need to provide proof of identity and proof of income to get approved for a car loan. Lenders may also require borrowers to provide proof of residence, proof of auto insurance, and basic information about the vehicle being financed.

What credit score do you need to qualify for a car loan?

Getting approved for a car loan may not require good credit. Consumers with bad credit may also qualify for auto loan financing, including deep subprime borrowers with credit scores between 300 and 500. Borrowers with bad credit can get approved for auto loan financing, but typically will be charged a high interest rate since they appear risky to lenders.

Can you get an auto loan with a credit score of 500 or less?

Yes, you may qualify for auto loan financing with a credit score of 500 or less. Keep in mind, though, that you likely will be offered less favorable interest rates or terms than if your credit score were higher.

Photo credit: iStock/Tero Vesalainen

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOALR-Q325-071

A lemon car is a new or used vehicle with a major problem that surfaces after you buy or lease it. If the dealer can’t fix the car, there are laws in place that enable you to to trade the car in for a new one or get your money back.

Lemon cars sometimes end up back on the market with “lemon titles” at deeply discounted prices. For a buyer who is knowledgeable about cars and willing to take some risk, a lemon car can sometimes be a good deal.

Here’s what you need to know about lemon cars, from how to figure out if you have one to whether or not it’s ever a good idea to buy one.

Lemon Car Meaning

While the legal definition of a lemon car varies from state to state, it generally refers to a vehicle that has a substantial defect that the manufacturer or dealer is unable to fix after a reasonable number of attempts. Typically, the defect needs to be something that makes the car unsafe or difficult to drive, such as faulty brakes, a broken transmission, or a dead engine.

It’s important to note that a lemon is different from a recall. A recall is a common occurrence in which a particular defect within the car needs to be fixed at the manufacturer’s expense. The defect is usually announced by the automaker and fixed by the dealership. A lemon, on the other hand, has a problem the dealer is not able to fix in a reasonable amount of time.

Lemon Car Laws

There are lemon laws on the books in every state to help protect consumers. Though the details vary, lemon laws essentially work like this: If you purchase a new or used vehicle that has a defect or condition that impairs its value and it has not been repaired after several attempts (typically three or four trips to the dealer), you should be compensated for the defect.

Remedies vary depending on the type and severity of the problem. The maximum compensation is either the complete repurchase or replacement of the vehicle, whichever is preferred by the customer.

When you make a lemon law claim, you’re basically saying your car didn’t live up to its warranty. That means you have to buy a car with a warranty to have a good case. However, it doesn’t have to be a brand new car. Used cars and trucks sold with warranties get lemon law protection as well.

You can find your state’s lemon laws by visiting the Better Business Bureau’s list of lemon laws by state or going to the website for your state’s attorney general or consumer protection office.

Determining If You Have a Lemon Car

If you recently purchased a new or pre-owned vehicle and you’re having a major issue with the car, you might have a lemon on your hands. Here are some of the signs that car might be classified as a lemon:

•  There are recurring problems with vehicle components, such as the brakes, transmission, or engine.

•  The issues affect the car’s safety and driveability.

•  The problems are not the result of poor maintenance or an accident, but rather appear to have come with the car.

•  The problems have not been resolved after a reasonable number of repair attempts.

You can also do some research to find out whether other drivers have had similar issues with the same make and model of vehicle.

If you think you have a lemon car, it’s a good idea to start collecting detailed records, including records of repair attempts and any correspondence you’ve had with the dealer or manufacturer. To start a complaint against the dealership that sold you the car, you’ll need to mail them a certified letter.

While you can often start a case without a lawyer, should the case become complicated or the dealership fights you on a refund, it can be a good idea to get professional legal advice.

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Lemon Title Car Value

If a car is determined to be a lemon, the manufacturer will generally take the car back and either replace it or reimburse the customer for the purchase price.

The car will then receive a “lemon” or “lemon buyback” title. If the dealer puts the car back on the market, they are legally obligated to let any potential buyers know that the car has a lemon title. This ensures that any future owner is aware that they are buying a lemon car that may have major issues.

A lemon car title is similar to a salvage title, which is given to a vehicle that’s considered a total loss by an insurer.

Though a lemon title is not as devastating to a car’s value as a salvage title, lemon title cars are typically offered at steeply discounted prices, which can make them tempting purchases.

However, buying a lemon car means you are willing to purchase a car that potentially has big issues. If the car had been repaired, it would no longer have the lemon title, but instead a rebuilt title.

Recommended: What Is the Most Common Auto Loan Scam?

Pros of a Lemon Car

There are certain advantages to buying a lemon title car, the biggest of which is its reduced price. These cars can be relatively cheap compared to buying that same car new or nearly new.

Another plus is that, aside from whatever defect it may have, the rest of the car is likely in nearly mint condition. Because these cars are returned within the warranty period, they often have relatively low miles on the odometer and little depreciation.

Depending on the car’s defect, you may potentially be able to get it fixed without a lot of added expense. To make sure that’s the case, however, it’s a good idea to review a lemon car’s history to find out exactly what the problem was that caused the lemon title, and also get the car thoroughly inspected by your mechanic.

Recommended: Subprime Auto Loans

Cons of a Lemon Car

One of the biggest disadvantages of buying a lemon car is that you don’t know exactly what you’re getting yourself into. In some cases, the reason a car was given a lemon title is because it has a complex problem that is difficult to sort out and repair. This could mean you’ll need to spend significant time and money to resolve the issue. The car could also potentially have other problems that have not yet surfaced.

Also keep in mind that when you buy a lemon car, you’ll get the lemon title, as well as a limited warranty. You can’t return the car. Lemon laws don’t apply because you bought the car knowing it was a lemon.

Another factor to consider is resale. Should you later decide to sell the car, potential buyers may balk at a lemon title, especially if the car is still experiencing issues. The appraisal value of the car may also be low due to the lemon title and the fact that the car is no longer nearly new.

Recommended: What Credit Score Do You Need to Refinance a Car?

Can You Refinance a Lemon Car?

If you took out a car loan to buy a car that turned out to be a lemon and got a refund, that money can be used to pay off the loan.

If the automaker replaces the vehicle, however, you can typically just keep the loan you have. You can also likely refinance that loan at some point down the line. Car loan refinancing essentially involves getting a new loan — ideally with better rates and terms — that you use to pay off your original loan. You then only make payments on the new loan. Refinancing can make sense if rates have gone down, you want to lower your monthly payments, and/or you’ve built your credit (and you can qualify for better rates and terms).

If you purchase a car with a lemon title, however, you may find it tricky to find financing. Lenders tend to be risk averse, which means they may not be willing to offer a loan for a vehicle with an uncertain future value.

However, if the lemon car has been repaired and now has a rebuilt title, you may be able to find a small bank, credit union, or online lender willing to finance, or refinance, the car.

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The Takeaway

If you purchase a car and it turns out to be a lemon, there are consumer laws in place to make sure you’re not stuck with the vehicle. For some intrepid car buyers, however, lemons present an opportunity to buy a car at a steep discount. If you think that the savings on the purchase price will more than make up for the cost of repairs, it might be a smart move.

Just keep in mind that you may find it difficult to find financing for the car unless it has been repaired and now has a rebuilt title. If the car is replaced, you may eventually have more options available, such as refinancing your loan.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

What does it mean when a car is a lemon?

A car is a lemon when it has a manufacturing defect that affects its safety and utility, and that defect can’t be fixed despite multiple attempts. If the vehicle is still under its warranty, you can file a claim with the manufacturer to have the vehicle bought back.

How do you determine if you have a lemon car?

If you have a car with chronic issues that is still under warranty, and the dealer has not been able to fix the problem after multiple attempts, you may have the right to make a lemon claim and get a new car or financial compensation.

Are there laws against financing lemon cars?

No. You can finance the purchase of a car with a lemon title. However, you may have difficulty finding a lender who is willing to provide a loan due to the increased risk involved.

Photo credit: iStock/skynesher

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This article is not intended to be legal advice. Please consult an attorney for advice.

SOALR-Q325-070

A balloon payment car loan works differently than standard auto loans. Rather than making steady, equal payments throughout the loan’s term, you’ll pay lower amounts each month up until the very last payment, which is the balloon payment.

While a balloon payment car loan can help keep your car payments lower for the time being, there’s always the risk that you won’t be ready when the big payment arrives. Read on to learn more about balloon auto loan pros and cons and how they differ from traditional loans and car leases.

What Is a Car Loan With a Balloon Payment?

A balloon auto loan is a final scheduled payment on your car loan that’s substantially greater than the prior monthly payments.

With a balloon auto loan, payments are smaller over its term — until the last payment, when the remaining balance is paid off in a large lump sum. This is different from how car loans work usually, where borrowers make a series of equal payments spread out over the loan’s term (for example, 36, 48, or 60 months).

When looking at who offers balloon auto loans, you may find that these loans are largely limited to dealerships. There will likely be fewer options to compare as opposed to if you were looking for a traditional car loan or to lease a vehicle.

Recommended: Guide to Finance Charges on Car Loans

How Balloon Auto Loans Work

Just like with traditional loans, the lender will offer an interest rate and certain terms and conditions for a balloon auto loan. What’s different about an auto balloon loan is that all but one payment will be lower: the final payment, or the balloon payment. This last payment will be significantly larger than the others, perhaps as much as half of the vehicle’s value.

The lender may, for example, offer a 48-month term with half of the amount due as the 48th or 49th payment. The other half of the amount owed would be broken down into 47 or 48 regular payments, which would be lower than what you’d get with a traditional car loan.

Balloon Auto Loans vs Traditional Auto Loans

As the definitions provided show, a car loan with a balloon payment is significantly different in structure than a traditional auto loan. While the monthly payments in a balloon payment auto loan are not intended to pay back the whole loan amount, traditional auto loan payments are designed to do exactly that.

To see exactly how balloon vs. traditional auto loans stack up, here’s a comparison. For the example, assume the following:

•  The loan amount is $40,000.

•  The loan’s term is 48 months.

•  The interest rate is 6.00%. (Note that a lender may offer different interest rates for auto balloon loans and traditional auto loans. In fact, loans with a balloon payment tend to be a higher risk for lenders, who therefore may charge a higher interest rate. But, for the sake of comparison, this example assumes the rate is the same.)

Traditional Auto Loans

For a traditional auto loan, the lender calculates a monthly payment based on the loan amount, interest rate, and term.

In our example, the monthly payment would be $939. At the end of the loan, the balance would be paid in full.

Balloon Auto Loans

With a balloon auto loan, the lender calculates a monthly payment on a portion of the loan amount (we’ll use 50%), interest rate, and term.

In our example, the monthly payment would be $469.50. At the end of the loan, however, there would be a $20,000 balance remaining that could be covered in cash, by selling the vehicle, or by refinancing your auto loan.

Traditional Car Loan vs Balloon Auto Loan (Based on Above Example)

Auto Balloon Loan vs Leasing

Taking out a loan that comes with an ending balloon payment is different from negotiating a car lease. With the first, you’re buying the vehicle and seeking the financing to do so. With the second, you’re essentially renting the vehicle, often with an option to buy it at the end of the lease.

Plus, with a lease you’re agreeing to limiting parameters — most notably, that you’ll stay within certain mileage limits. This isn’t the case with an auto loan with a balloon payment.

That being said, an auto balloon loan and leasing can be similar. With a car balloon loan and a short-term car lease, you can refinance or pay off the remaining balance in cash. If paid off in cash, then the vehicle is yours, free and clear. If you opt to refinance, then you’ll make monthly payments based on that loan’s interest rate and terms.

Balloon Auto Loans Pros and Cons

Wondering what the upsides — and downsides — of balloon auto loans are? Here’s a rundown of balloon auto loan pros and cons:

Balloon Auto Loan Pros

Here are the potential positives of a balloon payment car loan:

•   Up until the last payment, the amount owed is lower than with a comparable traditional loan.

•   Depending on how the lender structures the loan, you may be able to sell the vehicle and use that money to make the balloon payment.

•   You’ll have more cash in hand (until the final payment is due), which can help with cash flow.

•   You could take the difference between the traditional payment ($939 in our example) and the balloon one ($469.50 in our example) and save or invest those funds.

•   Because payments are lower, it’s more likely that you’ll be able to meet the monthly obligation.

Balloon Auto Loan Cons

On the other hand, here are the possible pitfalls of a car loan with balloon payment:

•   It may be challenging to make the final payment.

•   Interest rates may be higher.

•   Not making the balloon payment can hurt your credit scores.

•   The smaller payments you’re making mostly go to interest, which can put you in an upside-down situation (where the vehicle is worth less than what’s owed on it) if you try to sell or refinance the car when the balloon payment is owed.

•   Because the pre-balloon payments are much smaller than they would be with a traditional loan, it can be tempting to spend more than you can afford on the vehicle.

Recommended: What Type of Credit Is an Auto Loan?

Options for Dealing With a Balloon Payment

Here are some possible options for dealing with a balloon payment:

Paying the Car Off

One option for dealing with a balloon payment is simply paying it off when due. Making the large payment when due at the end of your balloon auto loan term would effectively pay off the loan and give you full ownership of the car.

Selling the Car

Another option for dealing with a balloon payment is selling your car to help you cover the outstanding balance of the loan. As mentioned earlier, you may be able to sell the vehicle and use that money to make the balloon payment.

Returning the Car

Some lenders may give you the right to return the vehicle as an alternative to making the large balloon payment. Lenders, however, may impose certain fees if you return the vehicle as an alternative to making the balloon payment.

Refinancing

Certain lenders may allow you to refinance a balloon auto loan as an alternative to making the large balloon payment. Refinancing allows you to replace the large final payment with manageable monthly payments by securing a new loan. To refinance, you’ll need to meet the lender’s credit requirements and provide necessary documentation like income proof and vehicle details.

Trading It In

You may consider trading in your car as an option for dealing with a balloon payment. Trading in your car may be challenging if your balloon auto loan is underwater. But if the value of your car is greater than the balloon payoff amount, trading in the vehicle at a car dealership can help you meet your balloon payment obligations.

Planning Ahead for Your Balloon Payment

Planning ahead for your balloon payment can help you determine a course of action that’s right for you. You can budget and set money aside if you plan on making the lump sum balloon payment. Or, you may choose to refinance your balloon auto loan. If so, it’s best to shop around for lenders and apply for the refinance well before the balloon payment is due.

Unless required by law, there’s no guarantee a lender will approve your balloon refinancing request. Planning ahead can help you prepare for your looming balloon payment or help you determine an alternative course of action that’s right for you.

Recommended: What Is a Private Party Auto Loan?

Is a Balloon Payment Car Loan Right For You?

Times when taking out a balloon payment car loan can make sense include the following situations:

•  You’re expecting additional income to be available when the balloon payment is due.

•  Investments you own will mature before the balloon payment is owed.

•  You have the money to make the higher payments, but you appreciate how the lender is carrying the deficit for you during the loan’s term.

•  You don’t have much money for a down payment, but you can meet the monthly car payments (and will be able to manage the balloon payment).

On the other hand, if you have any doubts about your ability to hand over that hefty last payment at the end of the loan’s term, a balloon payment auto loan might not be the best idea.

Recommended: What Are Car Loan Charge Offs?

Requirements for Balloon Payment Auto Loans

Although each lender will have its own requirements, in general, the two main requirements for a balloon auto loan are similar to those of a traditional car loan. Specifically, you will need to:

•  Have steady employment and an income that demonstrates to the lender that you can meet the car payments.

•  Have a credit score that meets or exceeds the individual lender’s standards.

Other Ways to Lower Your Car Payment

The lower monthly amount of a balloon payment car loan is an attractive feature to many people who want to buy a vehicle. If you’re seeking to lower the payment on your current vehicle or are exploring how to pay off a car loan with balloon payment, refinancing also can be an option.

You may decide to refinance with the same lender again, or you may compare loan programs among various lenders.

In either case, take into account the cost to refinance.

Before refinancing, it’s also important to take into consideration the pros and cons of refinancing your car. While you may end up with lower interest rate or lower monthly payments, thus freeing up some extra cash, you could also face fees and prepayment penalties.

Recommended: How to Calculate the APR on a Car Loan

The Takeaway

When buying a vehicle, a balloon loan is structured differently from a traditional vehicle loan. Payments throughout the term are lower because they’re based on only a portion of the loan amount with the remainder of what’s owed due and payable on the loan’s last payment. There are pros and cons to balloon payment car loans, and it makes sense to carefully weigh them before making the decision that’s right for you, as well as consider other options for affording a car.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

Is a balloon car loan a good idea?

A balloon car loan can be a good idea if you want lower monthly payments and plan to pay off the loan or trade in the car before the balloon payment is due. However, it carries risks, including a large final payment and potential difficulty refinancing or selling the vehicle.

Can you pay off a balloon car loan early?

Yes, you can typically pay off a balloon car loan early, but it’s important to check your loan agreement for prepayment penalties. Paying early can save on interest and reduce financial stress from the large final payment, making it a smart option if your finances allow.

Can you pay off a balloon payment in installments?

Paying off a balloon payment in installments depends on your lender’s terms. Some lenders may allow restructuring the payment into smaller installments, but this often requires refinancing. Discuss options with your lender in advance to avoid default or financial strain when the large final payment becomes due.

Photo credit: iStock/sefa ozel

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOALR-Q325-069