If you’ve got a car loan, missing payments can lead to more than just a bad credit score – you could end up losing your vehicle. This is what happens when your lender or leasing company takes back your car, a process known as repossession. It occurs when you’ve fallen behind on your loan or lease payments, and sometimes, it can happen without much warning if you’ve defaulted. If you’re concerned about car repossession, it’s essential to understand what a repo car is and the repossession process. Let’s dive into the details.
Defining Car Repossession: What Happens When You Can’t Pay?
Repossession, often simply called “repo,” happens when a lender or leasing company reclaims your vehicle due to nonpayment. When you finance a car, the vehicle itself acts as collateral for the loan. This means that until you’ve fully paid off the loan, the lender technically has a legal claim on the car. In the case of a lease, you are essentially renting the vehicle for an agreed period, typically two to four years.
Generally, lenders and leasing companies have the right to repossess your vehicle as soon as you miss a payment. However, it typically occurs after you are significantly behind, often around 90 days past due. Your specific loan or lease agreement should outline the exact point at which you’ll be considered in default and repossession can begin.
Once your car is repossessed, the lender or leasing company will usually sell it at auction. This sale is intended to recover the outstanding loan balance or the remaining value of the leased vehicle.
How Does the Car Repossession Process Work?
The repossession process isn’t always uniform; it can vary depending on your lender or leasing company. Adding to this, state laws governing repossession differ, meaning there’s no single nationwide process.
However, understanding the general steps involved in car repossession can help you know what to expect if you face this situation.
Types of Repossession: Voluntary vs. Involuntary
Repossession is usually involuntary, meaning it’s not your choice; the lender initiates it. However, if you realize you can’t keep up with payments, you can choose voluntary repossession. This involves returning the car to the lender or leasing company yourself.
Voluntary repossession, also known as voluntary surrender, can be a slightly better option than involuntary repossession. It can help you avoid some of the fees associated with involuntary repo, and it might look marginally better to future lenders. Choosing voluntary surrender can signal that you were responsible and cooperative in a difficult situation.
Vehicle Seizure: What to Expect
Lenders are generally not legally obligated to give you advance notice before repossessing your vehicle. In some states, lenders can even install a device known as a “kill switch” in vehicles. This technology can prevent you from starting the car, making the repossession process simpler for the lender.
However, there are limitations. Repossession agents are not allowed to “breach the peace.” This means they cannot use physical force, threaten violence, or take your car from a closed, locked garage without your permission. Furthermore, “kill switches” are prohibited in some states.
Repossession comes with additional costs you’ll be responsible for. These can include fees for storage, preparing the car for sale, attorney costs, prepayment penalties, and early lease termination charges.
Vehicle Sale and Deficiency Balance
After repossession, the lender or leasing company will take steps to sell the vehicle. They might decide to keep it, sell it privately, or, more commonly, sell it at a public auction. Some states require lenders to inform you about the auction’s location, giving you the option to bid on your car. You might also have the chance to repurchase the vehicle in a private sale or reinstate your loan by catching up on payments and fees.
If the sale price of the vehicle doesn’t cover the full amount you owe – including the costs of repossession – you will be left with a deficiency balance. 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 car sells for more than what you owe, including repossession expenses, some states require the lender or leasing company to return the surplus funds to you.
How Long Does a Repossession Affect Your Credit Score?
Repossessions have 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, repossession, along with late payments and default, can severely damage your credit score. This is true even if you choose voluntary surrender.
If the lender refers the deficiency balance to a collection agency, a collection account will also appear on your credit report, further harming your credit profile.
Consequently, having a repossession on your record can make it considerably harder to get approved for credit in the future, including future car loans or mortgages. While the negative impact lessens over time, especially if you build positive credit habits afterward, the initial damage is substantial.
Avoiding Car Repossession: Proactive Steps to Take
The best way to deal with repossession is to prevent it from happening in the first place. Consistently making your car payments in full and on time is crucial. However, if you foresee difficulty making a payment, here are proactive steps to consider to avoid losing your vehicle:
- Communicate with Your Lender Immediately: Don’t avoid your lender if you’re struggling. Open communication is key. Lenders often prefer to work out a solution with you rather than go through the costly and uncertain repossession process. They may be willing to help you find a way to manage your payments until you regain financial stability.
- Request Forbearance or Loan Modification: Explore options like forbearance, which might temporarily postpone your payments, or loan modification, which could permanently alter your loan terms, potentially reducing your monthly payments. The availability of these options depends on your lender and your specific situation.
- Catch Up on Payments Quickly: If you’ve already missed payments, prioritize getting current on your loan as soon as possible. Consider temporary sacrifices in other areas of your budget or seek assistance from loved ones or explore financial aid programs to free up funds to pay your car loan.
- Sell Your Vehicle: If your current car payments are unaffordable long-term, consider selling your vehicle or ending your lease early. Downsizing to a less expensive car with lower monthly payments might be a more sustainable solution. Be aware of potential costs associated with early loan payoff or lease termination.
- Refinance Your Auto Loan: If your credit is still reasonably good, refinancing your car loan might be an option. You could potentially secure a lower interest rate, reducing your monthly payment. Alternatively, extending the loan term can also lower monthly payments, though it will increase the total interest paid over the loan’s life.
- Consider Voluntary Surrender: If repossession seems inevitable, and you can’t find another solution, voluntarily surrendering your car might be a less damaging approach than involuntary repossession. It can help you avoid some fees and potentially mitigate some of the negative credit repercussions.
What to Do If Your Car is Repossessed: Immediate Actions
If your lender has repossessed your vehicle, here are important steps to consider to either recover your car or manage the situation effectively:
- Understand Your State’s Repossession Laws: Familiarize yourself with your state’s laws regarding repossession. Most states have specific regulations lenders must follow, such as providing post-repossession notifications and informing you about the vehicle sale. Knowing your rights ensures the lender adheres to legal procedures. 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.
- Try to Reinstate Your Loan: Explore the possibility of reinstating your loan or lease. This usually involves paying all past-due payments, along with repossession-related expenses incurred by the lender.
- Consider Buying Back Your Car: Depending on your state’s laws, you might be able to buy back your vehicle. In some states, lenders must notify you about public auctions, or they may allow you to repurchase it through a private sale by paying off the outstanding debt and repossession costs.
- Reassess Your Financial Situation: Reflect on the financial circumstances that led to the repossession. Evaluate your budget and determine if you need to make significant financial changes or seek professional credit counseling to manage your finances better.
- Take Steps to Improve Your Credit: Recognize that your credit score has likely been negatively affected. Check your credit report and credit score to understand the extent of the damage and identify other areas for credit improvement. Then, actively work on rebuilding your credit by establishing positive credit habits and managing your finances responsibly.
The Bottom Line: Managing Car Repossession
Vehicle repossession has severe consequences for your credit and overall financial health. Avoiding it should be a top priority. If you’re facing difficulty making payments or have already missed some, take immediate action using the preventative steps outlined above.
If repossession has already occurred, understand your options for potentially reinstating your loan, buying back your car, or moving forward financially. Throughout this challenging process, regularly monitor your credit score to understand the impact of repossession and track your progress as you work towards financial recovery and credit repair.
