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Vehicle loans and lease agreements use the car as collateral for the loan. If you stop making payments, the lender can take back the car through repossession.
A repossession — and the road leading up to it — can affect your credit in four ways, and the overall damage can be considerable. Once reported, repossession will remain on your credit report for seven years, much like other negative information on your credit report.
How credit score damage stacks up
1. Late payments
Any payment you make at least 30 days late can be noted on your credit reports. For every month that goes by without catching up, another mark can be added. If you skip two car payments, for instance, your credit reports will show both a 30-day late notice and a 60-day late notice. Because payment history is the largest of the factors affecting credit scores, the damage can be considerable.
Late payments stay on your credit reports for seven years from the date of the missed payment.
2. Loan default
Defaulting on a loan means you failed to uphold the agreement of the loan. Your loan can be considered in default 30 days after the payment was due. Because repossession is a hassle, however, your lender likely won’t consider you in default until 90 to 120 days of late or insufficient payments.
Your contract should lay out the lender’s conditions for determining default. The lender may be more lenient if you have an otherwise good payment history.
A defaulted car loan will show on your credit reports for seven years from the point the account became delinquent and was never again brought current.
Lenders generally can repossess the car at any point once you're in default. Typically, they do it no earlier than 60 days after you miss a payment.
Repossession is its own mark on your credit reports, which will linger for seven years from the original delinquency date.
Once the lender takes the vehicle back, it usually will resell it to recoup its losses. If the vehicle sells for less than you owe, you’ll have to pay the difference, known as a “deficiency balance.” The lender may also charge you towing and storage fees associated with the repossession.
If you don’t pay the remaining balance and repossession fees, the account may be turned over to collections. The collections account can appear on your credit reports and will stay for seven years from the time the original account became delinquent.
Further, the debt collector can sue you if collections efforts fail. If the debt collector wins or you don’t show up in court, a judgment against you will be granted.
How to rebuild credit after repossession
After repossession, you’ll be deemed a high-risk borrower, making it harder to get financing for your next car. If you can get a loan, it will carry higher interest. (Here are five ways to recover after a repossession.)
There is some good news: The effect of any negative mark on your credit reports fades over time. You can work to restore your credit after repossession by stacking up positive marks to offset the negatives. Here are three tactics:
Make on-time payments: Payment history is the biggest single factor determining your credit score, so be sure to pay every bill on time and in full.
Use a small portion of your available credit: The next biggest factor in your score is credit utilization, which is how much of your available credit you use. Experts say to keep it below 30%, and much lower is better.
Check your credit reports: You can dispute inaccurate information and ask for it to be removed.