If you’ve financed a vehicle with an auto loan, missing payments can lead to serious consequences beyond just damaging your credit score. Vehicle repossession, the process where your lender reclaims your car, is a real possibility if you fall behind on your payments. It’s crucial to understand when banks repo cars and the repossession process to protect yourself and your vehicle.
What is Car Repossession?
Car repossession is the legal process that allows a lender or leasing company to take back your vehicle due to nonpayment. When you finance a car, the vehicle itself acts as collateral for the loan. This means the lender technically holds ownership of the car until you’ve fully repaid the loan. Similarly, with a car lease, you are essentially renting the vehicle, and failure to adhere to the lease agreement, particularly payment terms, can result in repossession.
While lenders technically can initiate repossession as soon as you miss a payment, it’s more common for the process to begin when you are significantly behind, typically around 90 days past due on your car loan. Your specific loan or lease agreement will outline the exact point at which you are considered in default and repossession becomes a risk. After repossession, the lender will usually sell the vehicle, often at auction, to recover the outstanding loan amount or the vehicle’s value.
How Car Repossession Works
The exact car repossession process can vary depending on your lender and the specific laws in your state. Vehicle repossession regulations differ from state to state, so there’s no single, universal procedure. However, understanding the general steps involved can help you prepare and know what to expect.
Types of Repossession
Generally, car repossession is involuntary. This means it occurs without the borrower’s consent due to missed payments. However, voluntary repossession, also known as voluntary surrender, is an option. In this case, you proactively return the car to the lender when you know you can no longer keep up with payments.
Voluntary repossession can be a less costly alternative to involuntary repossession, potentially saving you some fees. It may also be viewed more favorably by future lenders as it demonstrates you took responsibility and cooperated with the lender.
Your Vehicle Is Seized
Lenders are not legally obligated to warn you before repossessing your vehicle. In some states, lenders are even permitted to install a kill switch in vehicles, which can remotely disable the car and simplify the repossession process.
However, lenders are restricted from “breaching the peace” during a repossession. This means they cannot use physical force, threaten violence, or take your car from a closed, secured garage without your permission. Kill switches are also prohibited in certain states.
Repossession often comes with additional fees. You may be responsible for costs like storage, auction preparation, legal fees, prepayment penalties, and lease early termination fees.
The Lender Sells the Vehicle
Once the lender has repossessed your vehicle, they can choose to keep it, sell it privately, or sell it at a public auction. Some states require lenders to inform you about the auction location, giving you the option to bid on your repossessed car. You might also have the possibility to repurchase the vehicle through a private sale or reinstate your original loan.
You Pay the Deficiency Balance (If Applicable)
If the sale price of your repossessed vehicle doesn’t cover the outstanding loan balance and repossession expenses, you will be left with a deficiency balance. If you fail to pay this deficiency balance, the lender may pursue legal action to recover the debt, depending on state laws.
Conversely, if the vehicle sells for more than what you owe, including repossession costs, some states require the lender to return the surplus funds to you.
How Long Does Repossession Stay on Your Credit?
Car 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 payment history is a major factor in your credit score, repossession can severely damage your score, even if you choose voluntary surrender.
Furthermore, if the lender sends the deficiency balance to a collection agency, this collection account will also appear on your credit report, further harming your credit profile.
Having a repossession on your credit report can make it considerably harder to get approved for credit in the future, including future car loans or mortgages. While the negative impact of repossession lessens over time, especially with responsible credit management and building a positive credit history, the initial damage is substantial.
How to Avoid Repossession
The best way to avoid car repossession is to consistently make your loan payments in full and on time. However, if you anticipate difficulty making a payment, or have already missed payments, here are proactive steps you can take to prevent losing your vehicle:
- Communicate with your lender immediately. Don’t avoid contact. Lenders are often willing to work with borrowers to find solutions because the repossession process is costly for them too, and there’s no guarantee they will recoup their losses.
- Request forbearance or loan modification. Explore options like temporary payment forbearance or a permanent loan modification to reduce your monthly payments. Lender options vary, so inquire about available assistance programs.
- Catch up on payments quickly. If you’ve already missed payments, prioritize getting current as soon as possible. Consider temporary financial help from family or friends, or seek financial assistance programs to free up funds for your car payment.
- Sell the vehicle. If you can no longer afford the payments, selling the car yourself and purchasing a less expensive vehicle can be a 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 possible. You could potentially secure a lower interest rate, reducing your monthly payment. Extending the loan term can also lower payments, but will increase the total interest paid over the loan’s life.
- Consider voluntary surrender. If repossession is inevitable and you can’t find a way to pay, voluntarily surrendering the car can help avoid some repossession fees and potentially lessen the negative credit impact compared to involuntary repossession.
What to Do if Your Car Is Repossessed
If your lender has repossessed your vehicle, there are still steps you can take to potentially recover the car or manage the financial aftermath:
- Understand your state’s repossession laws. Familiarize yourself with your state’s regulations regarding repossession. Most states have specific procedures lenders must follow, such as post-repossession notifications and auction sale details. Contact your state’s attorney general’s office for information on local repossession laws.
- Retrieve personal belongings. Contact the lender to arrange retrieval of your personal items from the repossessed vehicle. Lenders cannot legally keep or sell your personal property left in the car.
- Attempt to reinstate the loan. You may be able to reinstate your loan by paying all past-due payments, along with repossession costs incurred by the lender.
- Consider buying back the car. Depending on your state, you may be able to buy back your vehicle. Some states require lenders to notify you of public auctions or allow private purchase by paying the outstanding debt and repossession expenses.
- Reassess your financial situation. Evaluate the reasons behind the repossession and create a budget to manage your finances. Consider seeking credit counseling to develop better financial habits.
- Take steps to improve your credit. A repossession will negatively impact your credit score. Check your credit report and credit score to understand the damage and identify areas for improvement. Begin rebuilding your credit by establishing positive credit habits and responsible credit use.
The Bottom Line
Vehicle repossession is a serious event with significant financial and credit implications. Avoiding repossession should be a top priority for car owners with auto loans. If you are facing financial hardship and struggling to make car payments, proactive communication with your lender and exploring available options are crucial first steps.
If repossession occurs, understanding your rights, exploring options like loan reinstatement or vehicle repurchase, and taking immediate steps to manage your credit are essential for moving forward and rebuilding your financial stability. Continuously monitor your credit score to track the impact of repossession and your progress in credit recovery.
