Charge-Off

A charge-off is an accounting action taken by a lender when a borrower fails to make payments on a loan for an extended period, typically 120 to 180 days past due. In auto financing, a charge-off occurs when the lender concludes that the unpaid balance is unlikely to be collected under normal circumstances.

At this point, the lender writes the debt off as a loss for accounting purposes, but the borrower still legally owes the money. Charged-off accounts are usually sold to collection agencies, which then attempt to recover some or all of the debt.

For borrowers, a charge-off is one of the most damaging entries on a credit report, often lowering credit scores by 100 points or more and remaining visible for up to seven years. It signals to future lenders that the borrower failed to honor obligations, making new credit approvals much harder.

While lenders may still pursue collection through lawsuits or garnishments, many choose to sell the debt for pennies on the dollar. Borrowers facing charge-offs should communicate with lenders early to explore repayment options before the account reaches this stage.

Settling or negotiating payment after a charge-off can reduce financial damage, though the negative mark cannot be removed immediately. In auto loans, charge-offs often follow repossession or voluntary surrender, representing the lender’s final acknowledgment of loss.