Repossession and Your Credit: What You Need to Know

Auto Loans, Loans
Repossession and your credit

If you miss a payment on your car loan or lease, your car may be repossessed by the financing bank. Car repossession leaves you without transportation and with a seven-year blemish on your credit report, so it’s best avoided. Here’s what you need to know about what repossession is, how it works and what it does to your credit.

What is repossession?

A vehicle loan or lease agreement uses your new vehicle as collateral in case you fail to make your payments on time. If you stop making payments, the bank financing your loan can take back your vehicle in accordance with your contract and the state laws. This process is called repossession. The car may also be repossessed by a third party if the defaulted loan was sold to another agency.

Repossession doesn’t require the bank to give you notice or take you to court. Your car can be removed from your possession in whatever way is allowable by your state of residence and the contract you signed. Most states have laws prohibiting certain behavior, like threats or physical force, when seizing your vehicle. If these laws have been violated, you may be compensated for any resulting damage.

Once your car is seized, it’s either kept by the bank or third-party agency, or sold. Many state laws give you the right to know certain details of the sale. In the event of a public sale, you have the right to know the time and place. If you have since acquired the money to pay for the car, you can try to purchase it back. But keep in mind that you’ll likely have to pay the entire remaining debt on the car to do so.

If you live in a state with laws that allow for reinstatement, you can purchase your car back for the amount of back payments you owe plus the expenses incurred by your creditor to repossess it. You should only do this if you can continue to make your payments on time for the foreseeable future to avoid a second repossession.

If your car is sold to another party for less than you owed, you may be taken to court over the difference between what you owed plus any applicable fees and what the car sold for. This is called a deficiency. The deficiency may be lower if you voluntarily surrender your car — or turn it in, unprompted — because the repossession costs will be minimized.

How does repossession affect my credit?

A repossession — whether voluntary or not — will show up on your credit report and affect your credit score. According to Experian, repossession remains on your credit report for seven years. That said, negative information on your report affects your credit score less as time goes on, so you aren’t destined to seven years of awful credit if you take steps to improve your credit now.

It’s best to avoid repossession rather than deal with its aftermath. The best way to do this is to avoid financing or leasing a car that you can’t afford. If you already own the car and your budget is tight for a month or two, contact the financing bank to work out an alternate due date or a single late payment. The bank isn’t required to grant this request, but it might in order to avoid the headache of repossessing your vehicle. Communication isn’t only key in personal relationships — it can save your credit report from the level of bad luck normally reserved for those who break mirrors.

The takeaway: Avoid repossession and its subsequent damage to your credit by choosing a car you can afford at monthly terms you can meet for the life of the loan. If you do find yourself in a situation where you might have to make a payment late, contact your financing bank to try to work something out ahead of time. That way your good credit will remain intact and you won’t have to deal with the possible embarrassment of public repossession.

Car and woman pressing remote image via Shutterstock