Car repossession: What is it and how will it affect my credit?

A young woman calls a friend to see if car repossession can hurt credit.Image: A young woman calls a friend to see if car repossession can hurt credit.

In a Nutshell

A car repossession could happen if you fall behind on monthly payments. This can hurt your credit for up to seven years. It could also cost you thousands of dollars. Not only could you lose your car, but if the bank resells the vehicle for less than what you owe, you may be held responsible for paying the difference.
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Unlike a flat tire, patching up your credit after your car has been repossessed requires more than a quick fix.

If you miss loan payments that lead you to default on your auto loan, the laws in most states allow your creditor to take the car back at any time. And repossession can linger on your credit reports for years to come.

But that’s not all. It could also take a toll on your finances.

There are no easy answers if your car has been repossessed. But we can help you better understand what you might face during the repossession process.

What does it mean to have your car repossessed?

During a repossession, a lender or leasing company that holds the lien to your vehicle will take back that vehicle if you’ve fallen behind on payments. In many states, your lender has the right to repossess your vehicle as soon as you miss a payment — without warning or a court order. But some state laws require that a lender send notice before repossessing your car. This notice should detail the payments that were missed and provide you a deadline for catching up on payments before the lender takes the vehicle.

Before taking your vehicle away, the lender may use a starter interrupt device, or SID, to remotely deactivate the car’s ignition system (though rules on SIDs vary by state).

While repossession rules can differ from state to state, tow trucks are prohibited from “breaching the peace” to recover the car. That might include using physical force, damaging your property or removing the vehicle from a closed garage.

Typically, the lender must also return any personal belongings left inside your car.

4 ways a repossession could hurt your credit

There are several ways a vehicle repossession can ding your credit.

  1. Late payments — If your car is repossessed because you missed a payment, that late payment could stick around on your credit reports for up to seven years.
  2. Repossession — After your car is repossessed, the credit bureaus may include a note about the repossession in your credit reports for up to seven years.
  3. Collections — If you still owe money on your car loan, the lender might eventually hand over the debt to a collections agency. The collections account could show up on your credit reports for up to seven years, even after you repay the debt.
  4. Court judgments — If you refuse to repay the car loan, either the auto lender or collections agency could take legal action against you.

Keep in mind that each of these derogatory items may represent a separate entry on your credit reports. This means that if the auto lender takes away your car, your credit could suffer several blows from the same incident.

How much will it cost if my car is repossessed?

Your credit scores aren’t the only things that can suffer if your car is repossessed: Your bank account could, too. A car repossession could cost you thousands of dollars, even after the bank takes your car away.

You could lose your car — and if the bank resells the vehicle for less than what you owe, you may be held responsible for paying the difference. This is known as the “deficiency balance.” It includes the remaining loan balance, interest and any repossession expenses incurred by the bank.

Suppose you owe $10,000 on your auto loan, but you recently lost your job and stopped making payments. The bank pays a tow truck $300 to take the car back, and auctions it at a steep discount for $4,000. That means you owe a deficiency balance of $6,300.

You may also be on the hook for other repossession costs, such as fees associated with ending your lease or paying off your loan early.

How can I get my car back?

It might not be easy, but there are several ways you can try to get your car back.

You may be able to buy back the vehicle by paying the full amount you owe, according to the Federal Trade Commission.

That includes catching up on missed payments; reimbursing your lender for the cost of repossessing the car, such as towing and storage fees; and in many cases paying off the entire remaining loan balance.

You could also try to buy back your car at the repossession sale. In some states, your lender must notify you if the car will be sold at a public auction so that you have the option of bidding.

5 tips to avoid repossession

When you fall behind on your car payments, the bank may send a tow truck to repossess your vehicle, whether you’re driving to work or school, filling up at the gas station or even parking in your own driveway.

Playing a cat-and-mouse game with the bank will only delay the inevitable — there are better ways to solve your problems.

  1. Talk it out. We recommend you communicate with your auto lender. If you call to let your lender know that you’re struggling to make payments, it may be willing to restructure your loan, develop a new payment plan or defer payments until you’re back on your feet.
  2. Sell your car. You might want to consider selling your car, particularly if the vehicle is worth more than the remaining balance on your auto loan. This could help you avoid being hit with a repossession on your credit reports. Keep in mind that if the car sells for less than what you owe, you may be responsible for paying the difference.
  3. Turn over the keys. You could beat the bank to the punch by returning your car before it’s repossessed. This is known as a “voluntary surrender” or voluntary repossession. While a voluntary surrender will still hurt your credit, it could also show future lenders that you’re taking responsibility for your finances.
  4. Buy used. When you buy your next car, if you pay with cash instead of borrowing money from the bank, you won’t have to worry about your car being repossessed. Used cars are generally cheaper than new cars, so buying a pre-owned auto might help you with this strategy.
  5. Use other modes of transportation. Owning a car is a big financial investment. If you’re not sure you can afford it or you’re worried you might miss payments, consider riding public transportation or use Uber to get around. You could also bike or walk.
aaupdaterepoImage: aaupdaterepo

What’s next?

A car repossession is more than a bump in the road. The situation can take a bite out of your wallet and your credit.

But with patience, you can rebuild your credit — and put your car repossession in the rearview mirror.

About the author: Tim Devaney is a personal finance writer and credit card expert at Credit Karma. He’s a longtime journalist who prides himself on being a good storyteller who can explain complex information in an easily digestible wa… Read more.