Owning a car is a significant milestone for most people, giving them a sense of independence and mobility. However, car ownership comes with the responsibility of making timely payments on your loan. Failure to make these payments can result in auto repossession, which is when the dealer takes back their vehicle. This can have a significant impact on not only your credit score, but your overall financial stability.
No hard and fast rules exist about how many missed payments will cause a lender to initiate a repossession, just one is enough.
According to Cox Automotive, loans more than 60 days past due increased by 2% in the past year and was up 20.4% from a year earlier.
If you are one of the many who are worried about keeping up with their auto loan, here is what you need to know about car repossession.
Table of Contents:
What is Repossession?
Auto repossession is the legal process of the lender re-taking possession of the vehicle when the borrower fails to make payments as agreed in the loan agreement. Normally, the lender will send a notice of default and demand payment, allowing the borrower to catch up on the overdue amount.
Should the borrower fail within the given time frame, the lender has the legal right to repossess the vehicle without a court order in most states. Connecticut, Maine, New Hampshire, Rhode Island, and Vermont are the five states where it is not required.
It’s important to note that even in states where it is not required, certain guidelines must be followed by the lender in repossessing a vehicle, including avoiding breaching the peace and giving notice to the borrower before the repossession occurs.
Types of Repossession
When you’re faced with repossession, you have two options: voluntary or involuntary. Their differences are small but do come with important distinctions.
As its name suggests, voluntary repossessions are when you willingly forfeit your vehicle back to the lender or dealer. This route will still see your credit score take a hit, but it can take some of the stress out of the process. It could result in fewer repossession fees, and it shows that you’re willing to work with the lender positively. However, the biggest benefit is avoiding the cost of having a repo man take your car, which it can be hundreds or even thousands of dollars after the legal fees, repo agency fees including storage, and county or city fees.
If you don’t take your vehicle yourself, an involuntary repossession occurs. This means that a repo person can show up at any given time to seize your vehicle without warning.
Most lenders try to avoid repossessions because they almost always lose money.
Delinquencies are categorized as 30, 60, 90, and 120 days past due. Should your loan reach the 90-day mark, you can assume a repossession is imminent as very few lenders allow it to go beyond 120 days.
How to Avoid Auto Repossession
If you’re in default or close to being there, repossession can be a real possibility. You will need to work diligently if you are to avoid it. Here are a few ways how:
Talk to your lender
As soon as you know that you might face difficulties making your payments, let your lender know and get out in front of the problem. Don’t wait for your loan to default first. Depending on the bank you’re working with, they may work with you to prevent a default. Lowering or pausing your monthly payments while you get your finances in order is a way they can help, but remember lenders aren’t required to help you, so rationalize expectations.
Debt consolidation loans
Debt consolidation loans can help consolidate your debt if your car is repossessed. A new loan is taken out, allowing you to pay off your balance. To obtain an auto repossession loan you will need to have good credit and a steady source of income in addition to collateral.
Extending your loan term or lowering your interest rate can make your loan more affordable, but if you’ve missed payments or defaulted, you probably don’t have the credit to qualify for a refinance. Keep in mind that applying for financing can also impact your credit score, so make sure to apply for multiple loans at once to avoid multiple hits.
Sell your vehicle
Not the ideal option, but if your loan is too much you can sell your vehicle privately or at a dealership. If you aren’t upside down on your loan (owe more than it’s worth) you could switch to a more affordable vehicle. Ensure that the sale will cover the payoff amount of your loan in addition to any fees you owe.
Talk to a nonprofit credit counselor
A non-profit credit counselor is a great way to get help if you face repossession. They can help you understand your options and create a plan to get you back on track financially. A few of the ways they can help are by providing information and guidance, assisting you with your budget, negotiating with your creditors, help with debt consolidation options and continually providing guidance as you work through it.
Bankruptcy can help by providing a legal way to discharge or reorganize your debts and protect your assets.
Chapter 7 – Chapter 7 bankruptcy may be a viable option if you have significant unsecured debt and are unable to make the necessary payments. Through Chapter 7, the liquidation of non-exempt assets is used to pay off your creditors. However, exemptions may allow for the retention of your car or other assets.
Chapter 13 – If you are struggling to make payments on your car and wish to keep it, Chapter 13 bankruptcy may be worth considering. This form of bankruptcy permits the reorganization of debt into a manageable payment plan spanning three to five years. If you are behind on your car payments, any outstanding arrears can be added to the payment plan and paid off over time.
How Auto Repossession Works
Auto repossessions occur when borrowers default on their auto loan and are unable to make the payments agreed upon in the loan agreement. The lender has the legal right to take possession of the vehicle as collateral for the loan.
Normally, lenders will first send the borrowers a notice of default and allow them to catch up on their missed payments or negotiate new payment terms. If the borrower fails to make the necessary payments, lenders will typically send a notice of repossession and schedule a time and date to retake the vehicle.
Repossessions can occur in different ways depending on the state and the policies of the lender. In some cases, lenders may have a representative take possession of the vehicle from the borrower’s home or work. While in other cases, lenders may contract with a repo company to take back the vehicle.
Once the vehicle is in the lender’s possession, they will try to sell it at auction to recoup as much of the outstanding loan balance as possible. Should the sale price of the vehicle turn out to be less than the outstanding loan balance you still owe, the borrower is then responsible for paying the remaining amount on the vehicle.
8 Things to Know About Auto Repossession
1. The lender probably won’t need a court order
When you signed the financing contract for your vehicle loan, you likely gave the creditor the right to repossess your car without taking you to court or providing any notice if you fall behind. Some states require that the lender send a notice of default and right to cure before it can repossess the auto.
However, most states don’t require providing any notice before repossessing the vehicle and can come onto your property or a public or private lot to repossess, according to the Federal Trade Commission (FTC).
2. Hiding your car won’t stop repossession
Locking up your car in your or a friend’s garage for weeks may seem like the perfect anti-repo solution, but such deception will only delay the inevitable repossession. Once the lender figures out you’re hiding the vehicle, it can file with the court for a replevin, a judicial order for possession.
Instead of hiding, scrounge up as much money as possible by cutting expenses and contact your lender to see if you can avoid repossession by catching up on past-due payments.
3. Not having auto insurance can lead to repossession
If your financing agreement requires you to maintain adequate auto insurance and you fail to cover the vehicle, the lender may be able to repossess your car. Always read the vehicle financing agreement carefully and maintain the required insurance coverage.
4. Repo agents must obey the law
The guy who shows up to repossess your car can’t legally wrestle you to the ground, break into your closed garage or chase you down to repossess your vehicle. That’s because repossession agents aren’t allowed to commit a “breach of the peace.”
For example, a repo agent could commit a breach of the peace by using or making a threat of physical force or nabbing your car from a closed garage, says the FTC.
5. Repossession puts a dent in your credit
Auto repossession will show up on your credit report under “Current Manner of Payment” (MOP) and will negatively affect your credit score. In addition, the late payments that led to repossession will also hurt your score, since payment history comprises about 35% of your credit score.
Both repossession and late payments stay on your credit report for up to seven years. If your car gets repossessed, don’t give up on your credit. Make sure you make all other payments on time so you can rebuild your credit while you’re waiting for those negative marks to drop off your credit report.
6. You can get personal items back
Depending on state law, if your car gets repossessed along with your purse, phone or other personal items, you’ll probably have an opportunity to get your stuff back.
For example, in California, the lender or repossession agent is not required to let you retrieve personal items from the vehicle before repossessing it but must inventory “all personal effects” found in the repossessed vehicle and store them for a minimum of 60 days for you to claim. Florida law requires the repossession agent to allow the owner of the vehicle to remove all personal belongings from the car.
If you’re present during repossession, ask the agent if you can retrieve your personal items before your car is towed away.
7. You may have a chance to buy your car back
While it’s unlikely that you can afford to buy back your car after repossession, some states require the creditor to inform you of the date, time, and place of the potential sale or auction of your vehicle so you can have the chance to buy it back.
However, the lender may require you to pay the past due amount or full amount owed, in addition to storage, repossession, attorney, and preparation-for-sale fees before you can buy back the vehicle.
8. You’ll probably still owe money
If your car was repossessed, you’re still on the hook for the amount you owe the lender. They may try to recoup as much as possible by selling the vehicle privately or at auction.
If the price paid by the new buyer doesn’t cover the balance due on the car loan – and it probably won’t – you will still owe what’s known as the “deficiency balance.”
For example, let’s say you owe $20,000 on the car and the creditor sells it for $16,000 at auction. You’ll still owe the difference of $4,000 to the lender. And if you default on the debt or any judgment against you, that default may lower your credit score significantly.
How Auto Repossession Affects Your Credit
When a vehicle is repossessed, lenders can report this to the credit bureaus, which will result in several different types of negative remarks appearing on a credit report:
- Late payments: For each month that you miss a payment, a negative item appears in your report. Making up 35% of your FICO score, is your payment history.
- Loan default: Defaulting on a loan will leave a negative mark on your credit reports. Loan defaults can stay on your report for up to seven years.
- Collections: Even after the lender sells your repossessed vehicle your account can be turned over to collections. You are still liable for the remaining balance on the vehicle and lenders will do what they must to collect.
Repossession’s impact on your credit score is difficult to determine since it depends on various factors. The credit-scoring model that was used and which bureau provided the information are just two.
Remember, lenders can take legal action should they choose.
Although court judgments don’t appear on credit reports or factor into credit scores, they are still public records. If a lender brings this information up in the future, it could make it harder to qualify for future loans.
The Aftermath of Auto Repossession
After repossession, there are several options to regain possession of your car. All of them require you to pay the outstanding loan balance and related fees.
How to get a repossessed car back
If you want to get your repossessed car back, you need to contact the lender as soon as possible. They will inform you about the process to follow to get your account in balance. This includes paying the outstanding balance, any late or missing payments, repossession charges, and storage fees. You will also be informed about the options available to you, such as reinstating the loan or redeeming the vehicle.
Late or missing payments
Late or missed payments can significantly impact your credit score and make it difficult to secure credit in the future. To prevent this, make sure to pay your bills on time going forward. If you are having trouble making payments, contact your lender to discuss alternative payment plans or options.
If the lender had to store your car before selling it, you will need to pay storage fees. Make sure to get a breakdown of these fees from your lender as well.
If the car is sold for less than what you owe you will be responsible for paying the deficiency balance. This can be a significant amount, so make sure to plan accordingly.
Repairing Your Credit After Repossession
Rebuilding your credit after a repossession can take time, but it is possible. Make sure to pay your bills on time and keep your credit card balances low. You can also consider getting a secured credit card to help rebuild your credit.
If you need another car, it may be more challenging to secure financing after a repossession. However, some lenders specialize in working with people who have had a repossession on their credit history. Be prepared to pay a higher interest rate and put down a larger down payment.
Q:Does a repo hurt your credit?
Q:Will paying off a repo help my credit?
Q:How long does it take to build credit after a car repo?
Q:How much will my credit drop with a voluntary repo?
Q:When does a repo fall off credit?
If you are struggling to make auto payments Debt.com can help you get on the road to financial freedom.
Article last modified on May 1, 2023. Published by Debt.com, LLC