Car repossession is a serious issue that many car owners might face if they fall behind on their auto loan payments. Missing payments doesn’t just hurt your credit score; it can lead to losing your vehicle. If you’re wondering, “why do cars get repo?” and what you can do about it, this guide will provide you with essential information to understand the repossession process and how to prevent it.
What Triggers Car Repossession?
Repossession, often referred to as “repo,” happens when your lender or leasing company takes back your vehicle due to nonpayment. When you finance a car with an auto loan, the vehicle itself serves as collateral for the loan. This means that technically, the lender retains ownership of the car until you’ve fully paid off the loan. Similarly, with a car lease, you are essentially renting the vehicle, and failure to adhere to the lease terms, particularly payment schedules, can lead to repossession.
Lenders generally have the right to repossess your vehicle as soon as you default on your loan agreement, which can be as early as missing just one payment. However, in practice, repossession usually occurs after you are significantly behind, often around 90 days past due. Your specific loan or lease agreement will detail the exact point at which you’ll be considered in default and risk repossession.
Once your vehicle is repossessed, the lender will typically sell it at auction. The goal of this sale is to recover the outstanding loan balance or the remaining value of the leased vehicle.
The Car Repossession Process: Step-by-Step
The process of car repossession can vary depending on the lender and the specific regulations in your state. Car repossession laws differ from state to state, meaning there’s no single nationwide process. However, understanding the general steps involved can help you be prepared.
Types of Repossession: Voluntary vs. Involuntary
Generally, repossession is involuntary. This means it happens without the car owner’s consent due to missed payments. However, there’s also voluntary repossession, also known as voluntary surrender. If you know you can’t keep up with payments, you can choose to return the car to the lender yourself.
Voluntary repossession can be a less damaging option than involuntary repossession. It may help you avoid some of the fees associated with involuntary repo, and it can reflect better on your credit history as it shows you took responsibility and cooperated with the lender.
Vehicle Seizure: What to Expect
Lenders are not legally required to give you advance notice before they repossess your vehicle. In some states, they are even allowed to install a device, sometimes called a “kill switch,” that can prevent your car from starting, making repossession easier.
Alt text: Car being repossessed by a tow truck, illustrating involuntary vehicle repossession due to missed payments.
However, repossession agents are not allowed to “breach the peace” during the process. This means they cannot use physical force, threaten violence, or take your car from a closed, locked garage without your permission. Laws regarding “kill switches” also vary by state, with some states prohibiting them.
Be aware that repossession comes with various costs that you will be responsible for. These can include storage fees, costs for preparing the car for sale, attorney fees, prepayment penalties, and lease early termination fees.
The Lender Sells Your Vehicle
After repossession, the lender can decide to keep the vehicle or sell it. Sales are typically conducted privately or through public auctions. Some states require lenders to inform you about the auction location, giving you the option to bid on your repossessed vehicle. You might also have the chance to repurchase your car through a private sale or by reinstating your loan.
Deficiency Balance: When You Still Owe Money
If the sale price of your repossessed vehicle doesn’t cover the full amount you owe on the loan, including repossession costs, you will be left with a deficiency balance. Lenders in some states are legally permitted to sue you to recover this remaining debt if you fail to pay it.
Conversely, if the vehicle sells for more than what you owe, including all repossession-related expenses, some states mandate that the lender must return the surplus funds to you.
Impact of Repossession on Your Credit Score
Repossession has a significant negative impact on your credit. A repossession will stay on your credit report for seven years from the date of your first missed payment that led to the repossession. Payment history is the most critical factor in calculating your FICO® Score, so repossession, along with the associated late payments and default, can severely damage your credit score. This negative impact occurs even if you opt for voluntary surrender.
Alt text: An individual looking concerned while checking their credit score on a laptop after experiencing car repossession.
Furthermore, if the lender hires a collection agency to recover the deficiency balance, a collection account will also appear on your credit report, further harming your credit profile.
Having a repossession on your credit history can make it very difficult to get approved for future credit, including loans for another car, a home, or even credit cards. While the negative impact lessens over time, establishing good credit habits and building a positive credit history moving forward is crucial for recovery.
How to Prevent Your Car from Being Repossessed
The best way to avoid repossession is to consistently make your car payments in full and on time. However, if you anticipate difficulty in making a payment, or if you’ve already missed one, here are proactive steps you can take to prevent repossession:
- Communicate with Your Lender: Don’t avoid your lender if you’re struggling. Lenders often prefer to work with you to find a solution rather than go through the costly repossession process. Reach out to explain your situation and explore options.
- Request Forbearance or Loan Modification: Ask your lender about temporary forbearance programs that can pause or reduce your monthly payments for a period. Alternatively, inquire about loan modification options that could permanently adjust your loan terms to lower your monthly payments.
- Catch Up on Payments Quickly: If you’ve already missed payments, make it a priority to become current as soon as possible. Consider temporary financial assistance from family or friends, or explore options for cutting expenses in other areas of your budget to free up funds for your car payment.
- Sell Your Vehicle: If your current car payments are consistently unaffordable, consider selling your vehicle or ending your lease early and purchasing a less expensive car with lower monthly payments. Be aware of potential costs associated with early loan payoff or lease termination.
- Refinance Your Auto Loan: If you have decent credit, refinancing your auto loan might be an option. You may qualify for a lower interest rate, reducing your monthly payment. Extending your 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 can help you avoid some fees and potentially lessen the negative credit impact compared to an involuntary repossession.
What to Do If Your Car Has Been Repossessed
If your car has already been repossessed, there are still actions you can take to potentially recover your vehicle or manage the situation:
- Understand Your State’s Repossession Laws: Familiarize yourself with your state’s specific laws regarding repossession. Most states have regulations that lenders must follow, such as providing post-repossession notifications and informing you about the vehicle sale plans. 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 cannot legally 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 amounts, along with the lender’s repossession expenses.
- Consider Buying Back Your Car: Depending on your state’s laws, you may have the option to buy back your repossessed vehicle. Lenders in some states are required to notify you of public auctions or allow you to buy the car in a private sale by paying off the outstanding debt and repossession costs.
- Re-evaluate Your Finances: Take a close look at your financial situation to understand the reasons behind the repossession. Determine if you can make adjustments to your budget or if you would benefit from seeking professional credit counseling.
- Work on Improving 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 needing improvement. Then, take concrete steps to rebuild your credit by establishing positive financial habits.
The Bottom Line
Vehicle repossession is a serious financial event with significant consequences for your credit and overall financial well-being. Understanding why cars get repo and the repossession process is the first step in preventing it. If you are struggling with car payments, proactive communication with your lender and exploring available options are crucial. If repossession occurs, knowing your rights and the steps you can take afterward is essential to mitigate the damage and begin rebuilding your financial stability. Continuously monitor your credit score to stay informed about your credit health and track your progress as you navigate financial challenges related to car ownership.
