A car repossession happens after a series of missed payments and the lender believes you (the borrower) will not get “caught up” in a timely manner. The exact process and timeline depend on specific state laws and auto loan policy that dictate when your vehicle can be repossessed.
If you’ve missed one payment, you don’t have to worry about a tow truck stopping at your front door tomorrow, although you should do your best not to miss any more payments.
When Can A Vehicle Be Repossessed?
While many states allow banks to repossess a vehicle within 10 days of breaching the contract by missing a payment, most lenders won’t repossess a vehicle until the loan is 90 days late and entered default status.
It just doesn’t make financial sense for them to initiate a repossession if you probably just forgot a single payment or were only a week or late. To be certain, though, you should check with your lender or review the loan terms provided to you when the loan was originated.
How Lenders Repossess Vehicles
Before they repossess your vehicle, the lender normally goes to great lengths to attempt to collect payments. Repossessing a vehicle is often an option of last resort as they have to find another buyer for the vehicle to pay the remaining balance of your loan. This is why they most likely won’t take away your vehicle after missing a single payment, even though state law might permit them to repossess it if they really wanted to.
When they do decide to carry out a repossession, the lender may hire an agency or towing service to pick up your car at home or work. Unlike in the movies, the process is much more tranquil. They cannot be hostile or violent and must respect state and local laws while acquiring the vehicle.
After arriving at your house or place of work, the repo team will verify the vehicle’s VIN before towing it away. It might appear as if the vehicle is being taken away for service or donated to a charity to an innocent bystander.
Future Implications of a Vehicle Repossession
If your vehicle has been repossessed, many thoughts might be racing through your head, including, “What do I do now?” and, “Can I buy another car in the future?” The repossession remains on your credit report for seven years, during which time it’ll be much harder (and more expensive) to secure financing for an auto loan.
This is because auto lenders view applicants with a history of repossession as risky. Statistically, if somebody defaulted on a car loan recently, they are more likely to default on the next car loan.
After the repossession drops off your credit history or you become current on your payments and get your car back, your credit scores will improve. You might qualify for an auto loan, although it will have notably higher interest rates than your previous loan, and the borrowing limit might also be lower.
Some lenders are willing to give people with repossessed vehicles a second chance and an opportunity to rebuild the credit, albeit with significantly higher interest rates than somebody with a clean credit history.
What happens to your credit when your car is repossessed?
While your first thought might be how to get your car back, you also need to be aware of the lasting credit effects of a vehicle repossession. It will affect your credit scores the most during the first year or two, with your score potentially dropping as much as 100 points! As the repossession approaches the seven-year mark, your credit scores should gradually increase.
On your credit report, in the “Current Manner of Payment” field for the vehicle loan that has been repossessed, the phrase “Repossession” or “Voluntary Repossession” will appear. The latter is used when you give the car back to the lender before they forcibly take it from you. Regardless of how the vehicle is repossessed, it has a similar negative effect on your credit and still impacts your credit score for the next seven years.
The Negative Effects on Your Credit Report
Unfortunately, a car repossession isn’t a one-time impact on your credit report. A repossession occurs after a series of missed payments lead to the loan entering default status. Banks report any financial transactions that happen before, during, and after a vehicle repossession. In addition to the repossession on your credit report, four other financial events can populate your report as well:
- Missed Payments
Before the repossession, banks will report the late payments and ding your credit score. After issuing several warnings for three months (or 90 days) of missed payments, most banks might initiate the repossession process. Before the repossession ever occurs, the previously late payments have already penalized your credit score up to 100 points, and the repossession can drop it by another 100 points.
As each repossession is handled differently, credit scores can also drop even more depending on how the loan balance is paid. Obviously, these are huge decreases and can put you from an excellent credit score to a poor one because of a single car loan.
A deficiency is the difference between what you still owe the bank and the remaining loan balance at the time of the repossession. Of course, the car doesn’t do the bank any good since their primary objective is to make money on the loan, not the sale of the vehicle. Consequently, they might decide to sell the car at an auction to get their money back and avoid a loss of income.
As vehicles might not fetch “top dollar” at an auction, there might be a difference between the auction selling price and the remaining loan balance. This is called a deficiency, and you, as the original borrower, are responsible for paying it.
Let’s say a vehicle was sold at auction for $5,000, and your remaining outstanding balance is $3,000. The bank will hold you responsible for paying the $3,000 deficiency even though you no longer own the car.
When a deficiency is assessed, it remains on your credit report for seven years. It continues to penalize your credit score until it is paid in full, but to a much smaller extent than the actual repossession. If the bank recoups the entire remaining balance from the auction, however, then you don’t owe anything, and “Deficiency” will not appear on your credit report.
No matter how the bank sells a repossessed vehicle, the owner is still responsible for repaying the loan until the total balance reaches $0. If the deficiency cannot be repaid immediately, the bank transfers the loan to a collection agency, similar to unpaid medical debt or parking tickets. This also harms your credit, although not to the same extent as the missed payments or the actual repossession.
Loans transferred to a collection account also appear on your credit report for up to seven years and need to be repaid as soon as possible to start improving your credit score.
A judgment is probably the worst of the three post-repossession events that can be added to your credit report. This is a court ruling that happens when you lose a lawsuit related to the deficiency balance of your repossessed loan. It appears in the Public Records section of the report in addition to the other relevant items listed above.
A judgment might not impact your credit score to the same extent as the repossession did, but it still leaves a noticeable mark on your report that is visible to future lenders or employers. It serves as a huge red flag that repayment for the repossessed vehicle was court-ordered as the repossession was more complicated than paying back the loan difference after your vehicle was sold at auction.
What to Do After Your Vehicle Has Been Repossessed
If your vehicle has already been repossessed, your first priority is to repay the remaining loan balance to allow the event to drop off your report and begin rebuilding your credit. While your options might be limited, there are several ways you can approach this task.
Buy Your Vehicle Back
One option is to repurchase the vehicle from the bank. The repossession remains on your record, but you don’t have to try to find another means of transportation while making payments on a car you no longer own. This might be difficult for most people because you might not have the ability to buy the car outright.
On top of the defaulted loan amount, you’ll also owe repossession fees. Due to your recent default, another bank probably won’t be willing to lend you the money, unless perhaps it’s for a small balance. Even if you do get that loan, remember that your interest rates are likely to skyrocket.
Repay the Deficiency
Even if you cannot afford to repay the balance immediately and the deficiency is transferred to a collection agency, paying the balance off as soon as possible begins the process of improving your credit score. Once the balance has been paid in full, you’ll also have one less monthly payment, and you can begin saving up to purchase a more affordable vehicle with cash or obtain a smaller loan.
Rebuild Your Credit After Repossession
Depending on your credit score before the missed payments and repossession, you may no longer qualify for an unsecured credit card or other financial loans. One way to rebuild your credit is to apply for a secured credit card that requires a security deposit that is the same amount as your credit limit of $500.
You can only spend up to your security deposit each month but are still required to make monthly payments from a separate account. On the plus side, the monthly payments are reported to the credit bureaus and will slowly increase your credit score as you display a record of positive payments.
Responsibly using a secured credit card and applying for other small financial loans will help boost your credit score quicker than simply waiting for it to drop off your credit reports to apply for a new loan.
Possibly more important than applying for new credit, you should also ensure that any other existing loans you have are current. Timely payments are a huge influence on your credit score and can help improve it over time. If you can pay debt off early, that will also have a large positive effect on your loans.
What to Do Before Your Car is Repossessed
If you have missed a payment but still own your car, this is the best opportunity to prevent any damage to your credit because the repossession hasn’t happened yet. You can shift your spending to afford the monthly payment while negotiating with the bank. After the car is no longer in your driveway, you don’t hold the leverage to control your credit as before, so it’s critical to address the issue before things get out of control.
Sell the Vehicle
Perhaps your eyes were larger than your wallet when you drove your vehicle home from the dealership. If you can’t afford the monthly payment, you always have the option to sell the car.
Depending on the vehicle’s current market value, you might have to sell it for less than you owe on the balance due to depreciation. If so, you’ll need to find some additional money to pay the difference. However, it’s still better than the alternative of losing the car and still having to repay the deficiency because those derogatory items won’t be listed on your credit report.
Ask to Skip a Payment
Sometimes, banks will be willing to allow you to miss a monthly payment if you ask them before the due date. Interest will still accrue, but it won’t count as a missed payment on your credit report. It can’t hurt to ask, especially if that’s all the help you need to get back on track. If you don’t have a history of missed payments and are generally a good customer, you have a strong chance of making this option work.
Consult an Attorney
In some instances, you might refuse to make loan payments because you disagree with the loan terms. This happens if the dealer sold you a “lemon” or did not properly sell your repossessed vehicle, causing the deficiency to be larger than necessary. Until the issue is resolved, you still need to make the monthly payments.
If your complaint goes to court, the bank can always be ordered to issue a refund to you. However, this option does come with inherent risk, so it’s important to consult a reputable lawyer before taking any action.
Assuming the court rules against you and the circumstances of the lawsuit, there is the possibility that a judgment can be recorded on your credit history, an event almost as detrimental as the vehicle repossession. Some state court systems require the loser (you in this scenario) to pay the court costs and lawyer fees, which adds to the total amount owed to the bank.
The original repossession and judgment remain on your credit history as two separate items for seven years each. If you fail to repay the judgment, you could have a tax lien placed on your house or have your wages garnished. Make sure you have a strong case against the repossession before you follow this path.