Car repossession – How it works & how it affects your credit

With monthly EMI rates going over $650 on average, it’s harder than ever to pay back your car loan in 2022. With such high-interest rates, repossessions are also on the rise. In 2021 alone, more than 2.2 million vehicles were taken back. While most banks do give you some leeway to pay back the loan, defaulting for a few months can lead to repossession. And the fallout from this can affect your credit and finances for several years. Whether it’s a basic car like the Hyundai Elantra or a luxury offering like the BMW 3 Series, repossession can be devastating to your credit scores.

How the car repossession process works and how to avoid it

Whenever you secure a loan for a car, the item is still in security with the vendor. In case of the loan defaults, the lender has the right to take the car back, since the lender has the title till the loan is paid off. So, if you keep defaulting on your loan before the term is over and the title is yet to be transferred to your name, the lender will most likely repossess your car. Compared to homes and other items, cars have the highest repossession rate. In 2021, the rate hit 13%, significantly higher than other forms of confiscation for loan defaults.

Fortunately, some states have laws that require lenders to contact owners before repossessing their car, pushing them to pay back their loans. If the owner is unable to pay back the loans, voluntary repossession is an option i.e., returning the car to the lender by themselves. However, in most cases, the lender will come to take back the car, usually by force. Lenders can even take your car back without notifying you or asking for permission, although they cannot breach human rights laws and the peace of the neighborhood. After repossession, the lender must still pay back the loan if they want to retrieve the car back. If unpaid, the lender will sell or auction off your car to make back some of the costs, leaving the owner responsible for finishing off the loan by paying the remaining amount.

Generally, lenders begin the repossession process 90 days after defaulting on the loan. However, they can technically do it after one missed payment since they don’t need a court order. The process only starts after the lenders make sure you cannot pay back the loan, as they won’t make back most of the loan after auctioning off your car. For the whole process, lenders use towing services, usually from a third-party company.

How car repossession affects your credit score

More than anything, if your car gets repossessed, it will have a significant impact on your credit score. In some cases, it can take several years to bounce back, especially if there are several late payments in history. The whole event will be listed publicly in records, marking a permanent event in your credit report. And it can stay on your report for seven years, thus affecting your ability to secure loans in the future.

In most cases, even if the debt is passed on to another agency, it will still show up on the report, damaging your credit score. Repossession can also lead to a court trial in some cases. And they put forward a case to take legal action against you. And it will deter other lenders from giving you loans in the future.

Tips to avoid repossession

In case you fall behind on your monthly payments or you are at risk of repossession, here are some tips to delay the inevitable and give you a better chance of keeping your car.

• The first and most effective method is to talk with your lender about your payments and give them a valid reason for the delay. If possible, they may restructure your loan or give you more time to complete the payment.
• Another option is to sell your car (after getting a NOC and lender’s approval), especially if it’s in good condition and worth more than the usual market value. In this case, you’ll be able to pay back the loan fully, thus avoiding a black mark on your credit report. However, if you’re unable to pay back the full amount after selling the car, you will have to pay the difference directly.
• You can voluntarily surrender the car to your lender if all else fails. You can avoid possible towing charges and this also shows responsibility. This will help future lenders understand that you are a responsible person when you try to secure loans in the future. But keep in mind, it will still damage your credit score.
• If you’re short on funds, buying used cars will save you a lot of hassle. And they are available at a fraction of the cost of new cars. In this case, you won’t even need to take a loan depending on your financial status. And it doesn’t put a lot of stress on your credit situation.

Getting your car back

In case of a repossession, there are still ways to get your car back. The most common way is to buy the vehicle back by paying back the full amount and closing the loan. This amount will also include repossession charges, towing, storage fees, and more. Some states also hold auctions where you can buy back loan defaulted cars for a considerably less price than it sells for at retail.

Repairing your credit score

Fortunately, there are ways to repair your credit quicker. The easiest method to do so is to make timely payments on all other loans or mortgages. Even after a repossession, paying back your car loan quickly will help you repair your credit score. Also, make sure you don’t go overboard with credit card purchases every month; keep them as low as possible. Finally, avoid defaulting on all the usual bill payments like rent, utility, and more. If you improve your credit score enough in 7 years, the repossession will no longer appear in your credit report.