If you have a car loan, missing payments can lead to serious consequences beyond just a lower credit score. One of the most significant risks is repossession, which means you could lose your vehicle. A repo car, short for repossessed car, is what happens when your lender or leasing company takes back your vehicle because you’ve fallen behind on your payments. This can occur with little to no warning once you’ve defaulted on your auto loan. Understanding what a repo car means, how repossession works, and how to avoid it is crucial for any car owner.
Understanding Car Repossession: What it Means for You
To fully grasp “what does a repo car mean,” we need to define repossession itself. Repossession is the legal process where a lender or leasing company seizes your vehicle due to nonpayment. When you finance a car, the vehicle acts as collateral for the loan. This means the lender technically holds ownership of the car until you’ve repaid the debt in full. In the case of a lease, you’re essentially renting the vehicle for an agreed period, typically two to four years, and failure to keep up with payments can also lead to repossession.
Generally, lenders and leasing companies are legally permitted to repossess your vehicle as soon as you miss a payment. However, the repossession process usually begins after you are 90 days past due on your loan. Your specific loan or lease agreement will outline the exact point at which you are considered in default.
Once repossessed, the lender or leasing company will typically sell the vehicle at auction. The goal of this sale is to recover the outstanding loan balance or the remaining value of the leased vehicle.
How Car Repossession Works: A Step-by-Step Guide
The process of car repossession can differ based on your lender or leasing company and the specific laws of your state. Because regulations vary from state to state, there isn’t a single, universal repossession experience. However, understanding the general steps involved in car repossession can help you be prepared and know what to expect.
Types of Repossession: Voluntary vs. Involuntary
Repossession is usually involuntary, meaning it occurs without the borrower’s consent due to missed payments. However, there’s also voluntary repossession, sometimes referred to as voluntary surrender. If you anticipate falling behind on payments or know you cannot catch up, you can choose to voluntarily return the car to the lender or leasing company yourself.
Opting for voluntary repossession can be beneficial. It can help you avoid some of the additional fees associated with involuntary repossession, such as towing and storage costs. Furthermore, it might be viewed more favorably by future lenders, as it demonstrates that you took responsibility and cooperated with the lender. However, both voluntary and involuntary repossession will negatively impact your credit score.
Vehicle Seizure: The Repossession Process
Lenders are not legally obligated to warn you before seizing your vehicle. In some states, lenders are even allowed to install a “kill switch” in vehicles, which can remotely prevent you from starting the car, making repossession simpler for them.
However, lenders are prohibited from “breaching the peace” during repossession. This means they cannot use physical force, threaten violence, or remove your vehicle from a closed, locked garage without your permission. Some states also have laws that prohibit the use of kill switches.
Repossession often comes with various fees that you will be responsible for paying. These can include storage fees, costs for preparing the vehicle for sale, attorney fees, prepayment penalties, and lease early termination fees.
The Lender Sells Your Vehicle: Auction and Deficiency
After the lender or leasing company repossesses your vehicle, they may decide to keep it or sell it, either privately or through a public auction. In certain states, the lender is required to inform you about the auction’s location, giving you the option to bid on your repossessed vehicle. You might also have the opportunity to repurchase the vehicle in a private sale or reinstate your original loan by paying the overdue amount and associated fees.
Understanding the Deficiency Balance
If the sale of your repossessed vehicle doesn’t generate enough money to cover your outstanding loan balance and the costs associated with repossession, you will be left with a deficiency balance. This is the remaining amount you still owe to the lender. If you fail to pay this deficiency balance, in some states, the lender has the legal right to sue you to recover the debt.
Conversely, if the vehicle sale generates more money than what you owe on the loan or lease, including repossession expenses, some states mandate that the lender or leasing company must return the surplus amount to you.
How Repossession Impacts Your Credit Score
Repossession has a significant negative impact on your credit history. A repossession will remain on your credit report for seven years from the date of your first missed payment that led to the repossession. Since your payment history is the most influential factor in your FICO® Score, late payments, default, and repossession can severely damage your credit score. This holds true even if you choose voluntary surrender.
Furthermore, if the lender sends the deficiency balance to a collection agency, a separate collection account will also appear on your credit report, further compounding the negative effect on your credit profile.
Having a repossession on your credit report can make it significantly harder to get approved for credit in the future, including future car loans, mortgages, or even credit cards. While the negative impact of a repossession lessens over time, especially if you build positive credit habits subsequently, it remains a serious derogatory mark on your credit history for years.
How to Avoid Car Repossession: Proactive Steps
The best way to deal with repossession is to prevent it from happening in the first place. Making all your car payments fully and on time is crucial. However, if you anticipate difficulty making a payment, or have already missed one, here are proactive steps you can take to avoid losing your vehicle:
- Communicate with Your Lender: Don’t avoid your lender. Be upfront and honest about your financial struggles. Lenders are often willing to work with you because the repossession process is costly and doesn’t guarantee full recovery of the debt. They may be open to finding a solution that allows you to keep your car while you regain financial stability.
- Request Forbearance or Loan Modification: Explore options like forbearance, which could provide a temporary pause or reduction in your monthly payments. Loan modification could lead to a long-term adjustment of your payment terms, making them more manageable.
- Catch Up on Payments Quickly: If you’ve already missed a payment or two, prioritize getting current on your loan as soon as possible. Consider seeking temporary financial assistance from family or friends or exploring options to reduce expenses in other areas of your budget to free up funds for your car payment.
- Sell Your Vehicle: If you are struggling with payments, consider selling your current vehicle and purchasing a less expensive one with lower monthly payments. Keep in mind potential costs associated with early loan repayment or lease termination.
- Refinance Your Auto Loan: If your credit is still reasonably good, you might be eligible to refinance your car loan. Refinancing could potentially secure a lower interest rate, reducing your monthly payments. You could also extend the loan term, further lowering monthly payments, though this will mean paying more interest over the loan’s life.
- Consider Voluntary Surrender: If repossession seems inevitable, and you’ve exhausted other options, voluntarily surrendering your car might be a less damaging option than involuntary repossession. It could help you avoid some fees and potentially mitigate some of the negative credit repercussions.
What to Do If Your Car is Repossessed: Next Steps
If your lender has already repossessed your vehicle, there are still steps you can take to try and recover your car or manage the financial aftermath:
- Understand Your State’s Laws: Familiarize yourself with your state’s repossession laws. Most states have specific legal procedures lenders must follow, such as providing post-repossession notices and informing you about the vehicle sale. Contact your state’s attorney general’s office for information on repossession laws in your state.
- Retrieve Personal Belongings: If your car was repossessed without prior notice, contact the lender immediately to arrange the retrieval of your personal items from the vehicle. Lenders are not entitled to keep or sell your personal property.
- Attempt to Reinstate Your Loan: You might be able to reinstate your loan or lease by paying all past-due payments, along with any repossession-related expenses incurred by the lender.
- Consider Buying Back Your Car: Depending on your state’s laws, you may have the option to buy back your repossessed vehicle. Lenders are sometimes required to notify you of public auctions or allow you to purchase it through a private sale by paying off the outstanding debt and repossession costs.
- Reassess Your Financial Situation: Reflect on the circumstances that led to repossession. Evaluate your overall financial situation and determine if you need to make adjustments to your budget or seek professional credit counseling.
- Take Steps to Improve Your Credit: Recognize that your credit score has likely been negatively affected. Check your credit score and credit report to understand the damage and identify other areas for credit improvement. Then, actively work to rebuild your credit by establishing positive credit habits.
The Bottom Line: Understanding Repo Cars and Protecting Yourself
Vehicle repossession can have a severe impact on your credit score and overall financial well-being. Avoiding repossession should be a top priority for car owners. If you are facing financial difficulties and struggling to make car payments, taking proactive steps to communicate with your lender and explore your options is essential.
If repossession has already occurred, understanding your rights and the steps you can take to manage the situation is crucial. Whether you aim to reinstate your loan, buy back your vehicle, or move forward, consistently monitor your credit score to track the impact of your actions and monitor your progress as you work to improve your financial health.
