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 four ways, and the overall damage can be considerable. Here’s how it unfolds:
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.
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. The civil judgment can show on your credit reports for seven years from the filing date, provided it meets new rules for accuracy.
How to escape repossession or lessen the damage
Redeem the car: Many state laws on repossession give you the right to redeem your car before it’s resold. That means you pay the entire balance on the car, plus fees, in order to get it back.
Reinstate the loan: Your state’s laws or your loan agreement may give you the option to reinstate your loan. This is less costly than redeeming; you have to make up all your missed payments, plus fees, but you don’t have to pay the entire loan balance.
Both redemption and reinstatement are available only for a short time, and they won’t remove the mark of repossession from your credit reports. But they save you from having no car at a time when you might have a hard time financing another one because your credit has taken a beating.
Surrender the car: If you’re certain that you can’t afford your vehicle and may be heading toward repossession, consider a voluntary vehicle surrender. When you hand over your car voluntarily, you avoid being unsure when repossession will happen, and you might also escape some fees. The damage to your credit score is the same, but the fact that you were proactive will look slightly better to future lenders than an involuntary repossession.
Restoring your credit
Repossession involves several negative marks on your credit reports. That will harm your scores, especially your automotive-specific ones. 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.
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: About 20% of credit reports have errors, and about 5% have mistakes of the type that might drag down scores. You can dispute inaccurate information and ask for it to be removed.
More about handling car debt from NerdWallet