When you face financial difficulties and can no longer keep up with your auto loan payments, lenders have the right to repossess your vehicle. This involuntary repossession, often referred to as a “repo,” can significantly damage your credit history. Understanding how long this negative mark remains on your credit report is crucial for managing your financial future.
A “derogatory closure” on your auto loan, which includes repossession or voluntary surrender, indicates to potential lenders a past financial difficulty. Accounts closed due to charge-offs or those sold to collection agencies are also considered derogatory. These negative marks impact your credit scores as long as they appear on your credit report. However, the impact lessens as time passes.
For accounts closed due to repossession, voluntary surrender, or charge-off, the derogatory mark will stay on your credit report for seven years from the original delinquency date. This date, known as the original delinquency date, is the point when you first missed a payment that ultimately led to the derogatory status. After this seven-year period, the account is automatically removed from your credit report and will no longer affect your credit scores.
What Happens if You Still Owe Money on a Repossessed Car?
After a repossession or voluntary surrender, the lender typically sells the vehicle to recover the outstanding loan balance. However, the sale price might not cover the entire amount you owe. The remaining balance is known as a deficiency balance, and you are still responsible for paying it. If you fail to pay this deficiency balance, the lender may turn the debt over to a collection agency.
When a collection agency takes over the debt, a new collection account might appear on your credit report, in addition to the original auto loan account. It’s important to note that collection accounts related to a repossession are treated as an extension of the original debt. Therefore, the collection account will also be removed from your credit report seven years from the original delinquency date of the initial auto loan.
Will Paying Off a Repossessed Car Loan Improve My Credit?
Paying off a derogatory account, such as a repossession, charge-off, or foreclosure, will update your credit report to show the debt as “paid.” However, this doesn’t automatically erase the negative history. If the account has already been sold to a collection agency, the original account will still show the derogatory status and indicate that it was sold, while the collection account will be updated to “paid” upon settlement.
While paying off a repo car loan won’t immediately remove the derogatory mark, it can help your credit recover more quickly over time. Lenders often view paid accounts more favorably than unpaid ones. Paying off the debt may improve your chances of qualifying for new credit sooner than if the debt remained outstanding. For example, mortgage lenders usually require past-due accounts to be settled before approving a home loan.
Moreover, if your repo car debt was sold to a collection agency, paying off the collection account can lead to a more immediate credit score improvement. Many newer credit scoring models disregard paid collection accounts when calculating your scores, providing a potential boost once the debt is settled.
Rebuilding Your Credit After a Car Repossession
Having a repossession on your credit report is undoubtedly a setback, but it’s not the end of your creditworthiness. Rehabilitating your credit is possible. As discussed, paying off any outstanding balance after the vehicle sale is a crucial first step. Beyond that, here are other strategies to improve your credit scores:
- Make all payments on time: Consistent on-time payments for all your credit obligations are the most effective way to rebuild positive credit history.
- Keep credit card balances low: High credit utilization (the amount of credit you’re using compared to your credit limit) can negatively impact your scores. Aim to keep balances low.
- Become an authorized user: If a family member with good credit is willing, becoming an authorized user on their credit card can help you benefit from their positive credit history.
- Consider a secured credit card: Secured credit cards are designed for individuals with poor credit or limited credit history. Responsible use can help you rebuild credit.
Remember, time is a significant factor in credit recovery. As the repossession gets older, its impact on your credit scores will gradually decrease. By taking proactive steps to manage your credit responsibly, you can effectively rehabilitate your credit history and move towards a stronger financial future.
