What Happens if your Car is Repossessed

One of the worst items that can appear your credit report is a vehicle repossession. This is especially true if you’re looking to finance another vehicle. Depending upon the circumstances, however, there may be ways to prevent this from happening and, even if it occurs, to re-claim your vehicle.

You don’t own your car until it’s paid off

You may drive it to and from your job and, at night, it may sit in your driveway, but if you’re still making car payments the lender legally owns your vehicle. If you live in a “non title-holding” state, you won’t be given the vehicle title until the loan is paid off. If you live in a “title-holding” state and you’re the registered owner, you will be issued a title with the lender listed as the first secured party in the “lien holder” section of the title.

In other words, if you don’t have the title or a secured party is listed on the title you have, until you either receive the title or the lender sends you a release of lien letter, you don’t own your car.

Making timely payments

If you’re having financial problems to the point where you think you might be late making a payment, it’s very important that you contact your lender and explain the situation. The reason for doing this is twofold: the lender may be able to alter your payment plan and allow you to skip a payment (this will extend your current contract by a month), and, depending on how your finance contract is written and the state you live in, the lender may have the right to repossess your car if you miss the due date by just one day. By contacting them, you might be able to avoid a repossession and give yourself at least a few days to consider your options. Ian fact, in most states a lender has the right to seize a vehicle without a court order and without prior notice - so don’t expect a letter in the mail before it happens.

Voluntary and involuntary repossession

If all else fails and you’re faced with repossession, you should know that there are two types: voluntary and involuntary. During an involuntary repossession, the lender sends an agent (usually a towing company that specializes in this kind of work) to pick up your car. In a voluntary repossession, you return your vehicle to the lender (or a location designated by the lender). Returning the vehicle your self can save you money in towing charges.

Both types of repossession, however, look the same on your credit report and due equal damage to your credit scores.

Your rights during a repossession

Once your vehicle is repossessed, the lender must notify you within a reasonable amount of time as to when your vehicle will be sold at auction. Until this happens, it’s usually possible to buy back a vehicle from the lender by paying the entire balance of the loan plus expenses for repossession and storage - a long shot since the repossession happened because of missed payments. Another option offered by some lenders is loan reinstatement - usually by paying repossession expenses plus any overdue loan payments (plus fees).

Deficiency judgment

Just because you vehicle has been repossessed doesn’t mean you’re necessarily off the hook with the lender. If your vehicle is sold for more than the loan balance (plus repo expenses) you’re entitled to the difference. This is something that rarely happens since, if this were the case, you could’ve sold the vehicle yourself and avoided repossession in the first place.

In most instances, vehicles will be sold for less than the loan balance that now includes repossession fees. The lender will usually bill the borrower for the difference - called the deficiency balance. If the borrower fails to pay this, the lender can go to court and seek a deficiency judgment. At this point, the borrower is responsible for the deficiency balance plus court costs and, if the amount remains unpaid, the lender can petition the court to garnish a portion of the borrower’s income.

The impact of a repossession on credit scores

Needless to say, all of this adds up to a big hit on credit scores. The higher a credit score is to begin with, the bigger the hit it will take, and each issue (late payments, repossession, judgment, garnishment) drops a score even further. In most cases, you can forget about a traditional car loan for quite some time - negative marks remain on credit reports for seven years - while most subprime lenders won’t consider a loan until the repossession is at least a year old. This means the only option these buyers have is a buy here pay here tote the note car dealer with interest rates that approach 30 percent.

The bottom line

The takeaway from all this: Communication is the key. If you think you might have a problem making your next car payment, contact your lender immediately.