A car repossession is when a lender takes back the vehicle you financed due to loan default. Typically, repossession occurs when the borrower misses a payment. But what happens when your car gets repossessed? If you think you might be facing a repossession, it’s best to know just what's going to happen and how it affects you.
The Repossession Process
Because you owe your creditors money, the lender can take action by repossessing your vehicle in order to cover their losses. Depending on the state you live in, your lender may not send you a notice of repossession before the car is taken. And while lenders have the right to take your vehicle, they can’t commit a “breach of the peace” in order to retrieve it. This means they can’t use physical force or remove the car if it’s inside a closed garage.
Once the lender has your vehicle, they sell it at auction to cover the loan balance. The lender is usually required to notify you when the auction is taking place. If it’s a public auction, some laws require they disclose the time and place.
If you want to get your car back before it’s sold, you need to redeem it. This means you have to pay the loan balance in full along with repossession costs. Another option you may have is to reinstate the loan, which means making up any missed payments plus fees, along with any repossession costs, although not every lender is willing to do this.
Preventing a Repo
Did you know you can prevent repossession from occurring? The best way to do this is to talk to your lender. Most lenders are willing to work with you so you can catch up with your payments. If you know you won’t be able to make the next payment, let the lender know and ask if they have any repayment options, such as skipping a payment or two and adding them to the end of the loan.
Another option might be refinancing the loan to reduce the monthly payment by extending the loan term. The worst thing you can do is leave your lender in the dark about your financial situation – repossessing your vehicle is time consuming and expensive for the lender, and most would prefer to not go through it.
Types of Car Repossession
There are two types of car repossession:
- Involuntary – This is when the repo man comes and takes your vehicle without warning.
- Voluntary – Also known as voluntary surrender, this is when the borrower hands the car over to the lender to avoid repossession fees.
Even if you do give up the vehicle yourself and avoid the fees, a repo affects your credit score the same and stays on your credit reports for up to seven years. Rebuilding your credit after a repo can be very challenging.
Car Repossession Impacts
A repossession affects two things:
- Your credit score and reports – A late payment on a car loan can stay on your credit reports for up to seven years, and one repossession could drop your credit score by as much as 100 points. This can make it harder to get approved for financing in the future.
- Your finances – If your vehicle is sold at auction, and the sale doesn’t cover the amount owed, you have a deficiency balance. If you don’t have the funds to pay this off, it can be sent to collections. So, on top of the repossession, you end up having a collections account on your credit reports for seven years.
Getting Your Repo’d Car Back
Depending on the state you live in, you have two options to choose from if you want to get your repo’d car back:
- Reinstate – In some states, you have the right to reinstate the vehicle by making up any missed payments, plus repossession fees, in one lump sum. The loan is then current, but the repossession remains on your credit reports.
- Redemption – Redemption is the most common way to get your car back after a repo. The lender is required to send you a notice of the right to redeem your vehicle once it's been repossessed and include the payoff amount needed to redeem it (including repossession fees). But the trick is to act fast because once the car is sold you’re no longer able to redeem it. Once it's redeemed, the redemption will show up on your credit reports along with the repossession.
The Bottom Line
Going through repossession is never easy. The best way to prevent it from happening is to talk to your lender ahead of time. But, if it’s too late, you generally need to wait at least a year before you can get approved for another car loan.
If you’re in the market to buy a vehicle, let The Car Connection lead the way. With our simple auto loan request form, and our nationwide network of dealerships, we want to connect you to a local dealer that can help you get the financing you need. Start today!