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Why I’m Not Paying Off My Auto Loan

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Car Purchase

The following is a contribution from Joshua at CNA Finance. If you’re interested in contributing to Frugal Rules, please consult our guidelines and contact us.

Before you get to the post, I want to add that I am assuming some will have an issue with Joshua’s point of view in the post. I like to be able to give opposing view points on Frugal Rules in order to spur discussion. With that disclaimer, on to the post!

I’ve noticed a lot of articles and comments lately in the personal finance blogosphere about consumers not being willing to make a payment toward a debt because of how it might affect their credit score. This has lead me to believe that credit reporting rules are discouraging consumers from paying down debt.

Payments are always a good thing, right?

 

From various points of view, I found that this isn’t always the case. Speaking from personal experience I can say that sometimes payments can do more harm than good. Several years ago, I purchased a car. I put a few thousand dollars down and financed something like $15,000 through a major lender. I got a great interest rate, I loved my car and everything was going well. As a matter of fact, for the first year or so, I doubled my payments hoping to pay the car off much faster than the 72 month auto loan I’d taken out. And, it seemed to be working. After only a year or so, I’d paid off more than $5,000 of principal balance. Let alone the amount of money in interest that I paid over the course of a year.

Here Is Where It Gets Interesting

 

When I first purchased the car, I was doing very well. I wasn’t necessarily making $10,000 per month but, I could eat. Work seemed to be going well and, I didn’t have a care in the world. Being young, I didn’t save much. Although, I made decent money, I did what I could to spend it as fast as I could make it. Needless to say, that is a mistake that I regret to this day. But, if I would have saved a few hundred bucks a month when times were good, I wouldn’t have this story to tell you so, I guess it all worked out.

Unfortunately, the steady money machine decided to stop printing one day. Hours were being cut and some people were laid off so I decided to look for work elsewhere. I jumped ship and unfortunately landed on a sinking one and soon found myself unemployed. Once money stopped rolling in, I started looking for work, but, $9 per hour didn’t seem to go very far and the only thing I knew was something that didn’t seem to be in high demand. I couldn’t demand a great salary because I was facing a financial hardship and, I just wanted to put some food on the table at the end of each day. Anything would have worked. So, I ventured into starting a website while working like a dog for pennies.

Let’s Get Back To The Auto Loan

 

Because I was going through an incredibly draining financial hardship, it was almost impossible for me to make the payments I needed to make to my auto loan lender. Eventually, I had to make one of the hardest financial decisions I’d ever made. I had to decide to either hide my car from the repossession or, voluntarily give my car back. Of course, I chose the latter as I knew I didn’t deserve to own the car if I couldn’t afford to pay for it. After giving the car back, I stopped receiving bills, phone calls, etc… regarding my loan and I started to move on with my life. For about a year, maybe even two, I didn’t hear anything about the $9,000 loan that I still had to pay back. But, soon enough, I started to get calls from debt collectors.

At first, I just ignored the calls, figuring that if I ignored them they would stop. Unfortunately, that wasn’t the case. It seemed as though the more I ignored the calls, the more they really needed to get in touch with me. Which, makes a lot of sense because I don’t think I’d stop calling someone if they owed me $9,000! It’s been about 5 years now and I recently got a settlement offer in the mail. The lender is willing to settle the debt for $1,500 which seems like a more than generous settlement! But, I started thinking about it and decided that even though I am capable of paying it, I’m not going to.

So, Why Would I Not Pay Off The Debt?

 

Honestly, it all boils down to the rules set forth by the credit reporting agencies themselves. There is a rule that states if a debt or a portion of a debt is not collected within 7 years (in my state) it would be removed from my credit report and no longer affect my score.

So, if I’m understanding this rule correctly (please correct me in a comment if I’m not) all I have to do is dodge the thing for two more years and, I don’t have to pay a dime. If I do pay the settlement, the lender will report that the debt has been paid off at a settled amount and, the 7 year cycle would start over again. Still reporting poorly because it was not paid as agreed, only this time, it would be more recent. This means that if I do the right thing, which would be to pay off my debt, I’m going to be punished. But, if I do the wrong thing – dodge my debts, I won’t. Well, I generally like to do the right thing but, in this case, I think I’m going to take my chances.

This Is Not Advice

 

Although, this is my decision, it is not a decision that I would advise anyone else make. “Why?” you ask. Well, because I still stand a chance of being taken to court for the debt. I may eventually have to pay the entire thing off, by law! But, this is a chance that I’m willing to take. The way I look at it, it’s been several years without a payment and, they haven’t taken me to court yet. The company trying to collect is not the company that I originally did business with. This means that my debt has been sold to a collector, probably more than once. Chances are, they won’t ever take me to court over the debt. And, if they do, I can afford to handle it if needed. I’ve got a great credit score now and I’d rather risk having to pay off my entire debt someday than risk killing my credit score right now before I decide to buy a house in a year or two.

Final Thoughts

 

You’re probably wondering why I wrote this article. I can tell you, it wasn’t to brag. I mean, I made a lot of mistakes here. I have two goals with this article. First, that consumers will learn from my mistakes and not make the same ones. Second, maybe in some way, this article will land on the desk of an executive that will make a difference in reporting of positive things as a negative action.

What’s your opinion? Did I make the right or wrong call? What would you have done?

Editor’s note: I will hand it to Joshua in that he’s admitting his mistakes. That said, I know this would be a difficult situation for anyone to be in. In regards to handling debt, I believe the right thing to do is to deal with it head on as opposed to avoiding it. Like Joshua said, this is how he has chosen to handle it and please do not take it as advice.  🙂

Joshua Rodriguez is a personal finance blogger at CNA Finance.

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I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally. I'm also a freelance writer, and regularly contribute to GoBankingRates, Investopedia, Lending Tree and more. If you're wanting to learn how to monetize your blog, check out my blog coaching services to see how I can help you take your site to the next level.

50 Comments

  • I would have a hard time of simply walking away from my obligations unless I just absolutely could not come up with the money and could not support my family’s basic needs. If I had the money and owed the debt, I would pay them off over time. I would sleep better at night and it is the right thing to do. It seems like it is becoming more and more acceptable to simply walk away. I do not agree with this trent at all.

    • Hey Free Money Minute. Thanks for your comment. I understand the moral side of this and struggled with it for a while. But, the truth is, I’m not the only borrower involved. As a matter of fact, my Mom co-signed on the car and, when we got the settlement letter, she was very against paying. She explained the issues associated with paying and the risks of not doing so and we made the decision that we felt would be best. A lot of the decision however is based on the fact that my mom is trying to move and can’t afford another hit on her credit report right now. Maybe we’ll rethink the decision once she moves. However, I really wish it would harm people to settle past due debts.

  • If I owed the money, I would pay them, even though I can certainly understand your logic in not paying. For me, it just wouldn’t feel right to not pay off what is left.

    • Hey DC, thanks for your comment. I guess I’m definitely the minority vote on this one. The truth is, it really doesn’t feel right. But, it wouldn’t feel right to get dinged for doing the right thing either. And, because my mom is involved in the whole deal, I have to take that into consideration when making my decision. I guess I should have shared the whole story but, she didn’t want me to share her side of this decision.

  • Morally I would feel an obligation to pay off the loan. It was something I committed to repaying unless it was absolutely impossible. Although I can appreciate the desire to maximize the personal benefit within the rules, if I had the means then I would prefer to pay down the remaining amount anyways.

    It’s a controversial topic, thanks for posting!

    • Hey GamingYourFinances, thanks for your comment. You’re right, I did agree to the loan and agree to pay it back. However, because she wanted her opinion to stay out of the online world, I didn’t tell you guys much about my Mom’s involvement in this whole thing. Trust me, I struggled with this decision for a while but, after all that has happened, I can make a moral decision to pay off the debt or make a moral decision to help my mom. Unfortunately, each decision contradicts the other so, I can’t necessarily make them both. That being said, for my moral needs, I’ve got to stay on my Mom’s side.

  • If you owe the money, you should pay it but it’s ultimately your decision. You just have to make a decision that you can live with.

    • Hey Holly, I agree with you in most situations. However, in this situation, there are some underlying factors that I don’t have the permission to share. None the less, you can definitely trust that this is a decision I struggled quite a bit with. Thanks for your comment.

  • Froogalist says:

    Borrowing money to buy a depreciating asset like a car is not something I would do in the first place. And while I can understand your reasoning, walking away from a debt obligation is not something that I would feel comfortable with.

    • Hi Froogalist, thanks for your comment. I don’t agree with borrowing for depreciation, I did that before I really knew what I was doing. Walking away is definitely a hard decision and I can understand that most people would struggle with that. Let’s face it, I’m a service provider and, often times, people don’t pay their debts to me. It sucks! But, this situation is a very unique one. I wish I could share all the details but, I’m not going to upset Momma!

  • Pauline says:

    I don’t think I would walk out from a repayment obligation unless the lender has made a fault somehow, or charged an abusive fee, I would leave the fee amount outstanding. But what you say is you overpaid the loan in times of bonanza and weren’t able to make payments later on. Can’t that be negotiated? If I overpay my mortgage I can go to the bank and have a repayment holiday for the number of months I prepaid.

    • Hey Pauline. Yes, the debt has already been negotiated. I can settle for about 25% of what I owe. But, the problem is, if I do that, it hurts my credit even more than not paying. The worst part about it is, my mom’s credit is involved as well. So, I really don’t have all the decision making power and this is something that we both decided would be right for our unique position. Thanks for your comment!

  • I understand the rules, but from owning a business for many years and seeing people take out credit only to claim bankruptcy, I guess I think you should pay what you owe unless you are in some sort of crisis where you absolutely can’t. I don’t really care whether the big corporation gets the money, but I think I’d have to donate at least that much to charity to clear my conscience.

    • Hey Kim, the donation to charity is a great idea. I have the money in the bank right now. I think I’ll put it into Betterment to earn some return on it and, if it never goes to court and, it does fall off of my credit report, the end result will probably be to give it to a charity. Thanks again for your comment…it’s my favorite idea for this yet!

  • I think you made the right and risky call. I hope they will not really send you to court, good luck man!

  • Matt Becker says:

    I definitely understand why, from a practical standpoint, you’re choosing not to pay. It’s counter-intuitive and unfortunate that the more neglectful route is actually the most beneficial from a financial standpoint. I would like to think that I would “do the right thing” and pay back my debts in your situation, but I haven’t been in that situation and can’t honestly say for sure. I mean, what’s the real different between what you’re doing and settling for the $1500? In either case, you’re getting away with paying less than what you truly owe. It’s just a matter of degrees.

    • Hey Matt, thanks for your comment. The truth is, it’s not about the money. I’d love to pay the entire thing off. I’m not even interested in saving with the settlement. The bigger issue is the affect the settlement would have on my credit and more importantly, my co-signer’s credit. The truth is, we’ve been rebuilding for a while. Both of us are doing well. But, if we settle, it shows recent negative activity on our credit reports. The bottom line is, if we pay, we get penalized for doing the right thing.

  • This is ballsy. From what I understand, can’t they still continue to try to collect the debt from you, even after 7 years? The rule you are talking about is strictly credit reporting, which has nothing to do with the actual collection of the debt. Yes, you can dodge the loan for a few more years and it will be wiped from your credit report, but does that mean you don’t owe it? You haven’t done anything with the debt, you just figured out the law that would allow the credit reporting agency to forget it. It seems like two different parts to me.

    I would jump on the chance to pay the $1500 and just move on.

    • Hey Grayson, you’re probably right. However, if I settle after it falls off of my credit report, it won’t cause any negative issues to settle because the settlement won’t be reported. At that point, I may make that decision. I might also give the money to charity as Kim suggested above. I guess we’ll just have to give it time to see how it plays out.

  • No Waste says:

    I admire his honesty, but that’s about it.

    He has to be comfortable with the decision, no one else.

    • Thanks No Waste, I’m glad you admire my honesty at least. None the less, there are some underlying factors associated with this decision. I hope I don’t lose any fans over it but, instead of being promotional and looking like a corporation, I’ve decided to just be me. I want to let my followers in on my decision making process and, I know that not everyone will agree with me. As a matter of fact, when I wrote this post, I figured I’d upset a few people with my decision. Thanks for your comment.

  • As DC stated, the logic to not pay the debt is okay. Personally, my value system relies heavily on personal integrity, which means I pay my debts. I don’t begrudge you for taking advantage of a broken system, but it is not something I would do!

  • I have to say I’d feel weird about not paying what I owe. But I also know I do have some kind of support system that if all else fails (and I mean if ALL else fails) I could turn to my fall back options. I appreciate your honesty though!

  • Setting aside that, from an ethical standpoint, clearly you should pay the debt in full if you’re able, a few comments:
    – You’re right that the lifespan of credit report items is seven years (except bankruptcy, which is generally 10 years). However, your assumption about when the 7-year clock starting ticking on this particular debt may be incorrect.
    – A lesson for others: when you turned in your car, the owner sold it at auction–probably for a low price–and you still owe the difference between the auction proceeds and the outstanding loan balance + whatever repossession fees that likely were assessed. You probably would have been better off contacting the lender and asking permission to sell the car yourself because you would have gotten a better price.
    – You can be sued for collection, regardless of whether the debt is on your credit report, as long as the debt hasn’t passed your state’s statute of limitations time limit for debts of this type. You might have to get an attorney involved to determine definitively when the statute time limit expires for this debt. The time an item stays on a credit report and the time during which you can be sued for collection are completely independent, and the latter varies by state.
    – Even when the statute of limitations expires, you still owe the debt. You just can’t be sued. I don’t know if you’ve ever been subjected to debt collection tactics, but they’re designed of course to make repayment seem like your best option. Read up on banned debt collection practices at the FTC’s website, and you’ve pretty much got a blueprint for most debt collection agencies’ business model. How would you like a debt collector to phone your relatives or employer and ask for help in persuading you to repay what you owe? It happens, every day.

    Good luck!

  • I understand your rationale but would pay it myself. Especially since the amount is relatively little in comparison to amount still owed and you can afford it. If you were struggling then I could see focusing on other things and having it as an extremely low/non priority.

  • I probably would have accepted their offer to pay it off for $1500 but I’m not even in a position to afford that right now so it’s hard to say. I may be going against the grain here, but I hope this works out in your favor!

  • This might be a bit too harsh, but I’m not understanding the morality here. You justified turning in the car because didn’t “deserve to own” it yet you you are able to rationalize away not meeting the obligations on the debt you owe? That seems conflicted…as if you thought you took the “high ground” but really aren’t.

    In any case, instead of turning the car in, why didn’t you just sell it? If you’d already aggressively paid down the principal in the beginning, then you might’ve been able to get enough on the sell to pay off most of the remaining loan. Whatever might’ve been left would’ve been much easier to handle.

    • Hey Mr. Utopia, thanks for your comment. I’m sure the morality can be a bit tricky to understand but, there are underlying circumstances that I can’t openly talk about online in this case. As far as selling it, well, I was 21, going through financial struggles and 4 months behind on a car I as $1,000.00 or so upside down on still. Talk about investments with depreciating returns…Anyway, if I sold the car, I’d have to come up with at least a grand to get the title to the buyer. Unfortunately, I couldn’t do that and really, I should have thought to call the company I borrowed from but, truth is, young ignorance took over in that decision.

  • Angela says:

    I understand the 7 year rule to mean that if there has been no contact for 7 years, then they can’t collect, but if they make one call or send one letter, the 7 years starts again. That would mean for you that the 7 years is just starting because you received a settlement letter and it would be easier to settle. We settled business debt a few years ago and it was during that time that I came to that understanding. But I could be wrong…

    • Hey Angela, there is no way to prove that I actually received the settlement letter. The only time contact stands with regards to credit reporting is face to face or over the phone as far as I understand. Thanks for your comment and concern. I do think I’m going to pay it off now. That’s why I love the PF community…it tends to pound the financial stupidity out of you as you become part of it! Thanks for your comment!

  • Romona (@monasez) says:

    I totally understand why you made the decision you made. I personally would have just paid the $1500. If I didn’t have the money then I probably would have ignored it and made the same decision your making right now.The fact is life is tough and sometimes we have to make some hard decisions. Things happen. Anyway, I wish you the best.

    • Hey Romona, thanks for your comment. After reading the detailed information Kurt had to share, I realize, I really should pay this thing off. I hope that it doesn’t have too much of a negative affect for me or my mom, who co-signed. But, it may come back to bite us later if we don’t do it. Now, I’ve just gotta talk her into allowing me to pay it.

  • E.M. says:

    It is great that you were able to be honest and transparent about your decision. Not one I would personally make, but you’re not alone. One of my coworkers was telling us a story about how, at 19, he racked up a bunch of debt. He was a stock broker, making way more than he ever imagined, and didn’t know what to do with himself. He chose not to pay it back and it got dropped after the 7 year mark. He saw the situation much like you did – why bother when it will likely go away?

    • Hey EM, thanks for your comment. I know I’m not alone but, I did expect quite a few people to disagree with this one. If nothing else, it’s a great conversations starter. Thanks for your support!

  • Derek @ MoneyAhoy.com says:

    Did you even find a new job? I would settle with them once you get a job.

    This is the reason many other people are charged higher fees and interest rates – people trying to cheat the system. You’re screwing yourself and everyone else with higher rates for everyone by trying to get out of your obligations bro 🙂

    • Derek @ MoneyAhoy.com says:

      Also I forgot to mention… I think they’d be able to put a lien on your house (if you own one). So, when you go to sell your house they’ll get their money.

      I think others above have also mentioned they could sue you…

  • anna says:

    I would feel weird not paying it off, but if there are underlying factors in play then perhaps that would be a game changer. This is definitely not something I would normally read, so thanks for the different perspective, at least!

    • Hey Anna, thanks for your comment. I’m glad I could bring something new and interesting! The truth is, I may go with paying it off, I’m really leaning that way. I just have to make sure that the decision is a mutual one. I’ll piss off the bank before I piss off mom any day!

  • Thanks for sharing, Joshua. Interesting article, and honestly, I don’t think I can say what I’d do unless I were in that situation. Sounds like you made the right decision for you, and that’s the important part.

    • Hey Laurie, you’re awesome! Thanks for your support. However, Kurt really did bring up some good arguments and I think his great information along with the rants, kind disagreements, ect…may have changed my mind. I could be getting myself way over my head here.

  • Way to stick it to the man!! Haha. I don’t know if it’s the wisest thing to do, but your argument does make some sense. In fact, I’m a bit confused that you still owned $9G’s if you gave the car back…

    • Hey Todd, thanks for your support but, I think I am going to at least settle it. That’s thanks to Kurt and his kind warnings above along with a couple of hours to think it over. Anyway, I still owe 9k because I purchased the car for 18.5k, somehow the lender slipped in this fee, that fee and the cat and the hat fee and my loan came out to about 21k. But who cares? I didn’t, I was young, dumb and…getting a car! Anyway, I paid it down to 11.5k before giving it back. They auctioned off the car. The auction must have been out doors in the middle of a hurricane because somehow for a great car, they could only seem to scrounge up 2200 bucks! I was left to pay the difference. But, that’s what I agreed to when I signed up for the loan.

  • I personally wouldn’t take this advice and simply ignore my payments.

  • Benji says:

    I understand both points. But don’t you think it’s a bit ironic to protect your credit by not paying debt? It’s not a break down in the system. It’s a breakdown in the integrity of the debtor. The reason businesses are failing, is people like you. Don’t blame the sinking ship, lets blame the iceberg instead. It’s funny you’re trying to protect your credit…of which you clearly don’t have any. Do you think you deserve good credit for running away from the mistakes you’ve made?

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