If you fall behind on payments for your car loan, you risk having your car repossessed, or taken back by the lender. That can happen even without a court order. Repossession (or "repo") doesn't just leave you without a car: it will also negatively impact your credit for years to come, which will make it harder to qualify for another car loan, as well as credit cards or a mortgage.
Learn how repossession works, what it does to your credit, and how to rebuild your credit if your car is repossessed.
What Is Repossession?
Repossession occurs when an auto lender takes possession of your vehicle, sometimes without warning you in advance or having permission from the court. Vehicle repossession laws vary by state. Your vehicle purchase contract should include details about how and when your auto lender can repossess your vehicle.
Repossession typically occurs after you fall behind on your auto loan payments. Depending on your contract, your lender may be able to start the repossession process after the first missed payment.
If you declare bankruptcy, an automatic stay goes into effect, which stops creditors from pursuing collections against you. That prevents your car from being repossessed. However, the lender can ask the court to lift the stay in order to repossess your car.
Some states have laws that require lenders to notify you before they repossess your vehicle, including alerting you to payments that have been missed and allowing you time to make up any that you owe.
Two Types of Repossession
There are two major types of repossession: voluntary and involuntary.
Voluntary repossession occurs when you give your car back to the lender, usually because you can no longer afford to make the monthly payments. However, when people talk about repossession, they typically mean involuntary repossession, which occurs when the lender comes to take back the car.
Under the Servicemembers Civil Relief Act, active-duty members of the military have legal protections relating to installment contracts (such as auto loans) that prevent a lender from repossessing those people's cars without court orders.
The lender can sometimes take the car from your property without your permission. However, they cannot disturb you or your neighbors in the process. In some states, they are prevented from "breaching the peace," which includes:
- Threatening or using physical force
- Disturbing your neighbors
- Removing a vehicle from a closed garage without permission
- Continuing with repossession after you have refused to cooperate
If the lender breaches the peace during the repossession, you may be able to sue for damages.
If your vehicle is repossessed, whether voluntarily or involuntarily, your auto loan will not be canceled. You will still owe the balance due on your loan, even after the vehicle is repossessed. Your auto lender can continue to collect on the auto loan by calling you, sending letters, or using a third-party debt collector.
Your lender may sell or auction your vehicle to try to recover the cost of your loan. However, if the sale price is not enough to cover your loan, you will still be responsible for paying the deficiency, or the difference between the sale amount and what you owe.
How Repossession Impacts Your Credit
Repossession hurts your credit score and can make your financial life more difficult for years to come. Any late payments leading up to the repossession will damage your credit score once they're reported to credit bureaus. The repossession itself will be listed in the public records section of your credit report as well.
If the lender obtains a deficiency judgment for the balance of the auto loan, that judgment will also go on your credit report. If the debt is sold to a collections agency, the new account will show up as a new entry on your credit report, which will also lower your credit score.
Repossession and the associated negative items will remain on your credit report for seven years, even for a voluntary repossession.
Can You Avoid Repossession?
You may be able to avoid repossession by catching up on your delinquent payments. Talk to your lender to find out how much you need to pay to bring your account current again. Late payment entries may still show up on your credit report. However, by catching up on your payments, you can avoid having your vehicle repossessed.
If your loan payments are too high, consider refinancing into a new car loan with more affordable payments. The refinanced loan may lower your monthly payment with a longer repayment period, a lower interest rate, or both.
Refinancing can also lead to what is referred to as an "upside-down loan," which is the point at which the value of your car may be less than what you still owe on it. Because of that risk, it is important to consider your refinancing options carefully.
Because refinancing often requires you to have good credit, you should start trying to refinance your loan before you miss any payments. Missed payments may disqualify you for a refinance, or if you do qualify, the loan terms might not get you into a lower monthly payment.
Repairing Your Credit After Repossession
A repossession will impact your credit significantly but not forever. The impact on your credit score will lessen as time passes and as you make timely payments on your other credit obligations.
You can rebuild your credit score by:
- Paying off any outstanding debt on your car loan
- Keeping up with other debt payments, such as student loans
- Keeping low balances on credit cards and paying them off every month
- Continuing to make on-time payments for rent, utilities, and medical bills
As you make timely payments on your other accounts, you will offset the damage from the repossession. After seven years, it will no longer show up on your credit report.