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Having your car repossessed can be a stressful experience, especially if you need transportation to get to and from work or school. It may also cause you to worry you won't be able to finance a car to replace the one that's been taken back.
Securing a loan to buy a new car is possible even with a repossession on your credit report. However, you may have a hard time finding a lender. And if you do get approved, the financing can be expensive. Here's everything you need to know.
How Does Auto Repossession Work?
When you finance a vehicle purchase with an auto loan, the lender owns the car until you pay off the debt—at that point, the lender will send you the title, and you'll own the vehicle free and clear. And since the car is theirs while you make payments, the lender has the right to take possession of it if you stop making payments on your loan.
Repossession laws vary from state to state, and lenders can set different rules on how long your account can be delinquent before it's determined to be in default. In many states, lenders are even allowed to seize the vehicle without notice as soon as you're in default. State or local laws may also prohibit lenders from certain tactics, such as removing a car from a closed garage without your permission, using physical force or making threats.
Once your car is repossessed, a lender may sell it at auction to recoup its losses. If your car is auctioned for less than what you owe, you may still owe the difference to the lender. You'll also be on the hook for expenses related to the repossession, including storage, sale preparation costs, attorney fees and more.
Can You Buy a Car After a Repossession?
It's possible to secure financing for a vehicle after a repossession, but you'll have a harder time finding lenders. This is primarily because a repossession signals a default on your loan, which is something lenders are likely to consider when determining whether to extend credit.
Your payment history is one of the most important factors in your creditworthiness and, as a result, many traditional banks and lenders may not work with you if you've previously defaulted. If you do get approved, either through a bank, credit union or an online lender, you can expect the loan to have unfavorable terms, including a high interest rate.
To improve your chances of getting a car loan, consider asking a trusted family member to cosign the application with you. The lender will consider the credit histories of both people who signed the loan to make a decision. When someone cosigns a loan, they are agreeing to assume responsibility if the primary borrower stops making payments. So if you think you may end up in the same situation as you were with your past repossession, you could end up risking your cosigner's financial and credit health as well.
Without a cosigner, you may be able to increase your chances of getting a car loan by putting more money down and—if you have the time—working on improving other aspects of your credit history.
How Repossession Affects Your Credit Score
A repossession can stay on your credit report for up to seven years from the original delinquency date. And since your payment history is the most influential factor in your FICO® Score☉ , the missed payments leading up to your repossession will also have a significant negative impact on your credit score. Here are the different ways it can hurt you:
- Late payments: Before the lender seizes your vehicle, it'll report your initial late payments that can lead to a default and repossession.
- Default: A repossession is a sign that you didn't pay your debt as originally agreed, and once the lender reports that you defaulted, it can hurt your score even more than the late payments.
- Collections: In many cases, auto lenders don't send an auto loan to collections because they can seize the vehicle and sell it to collect the debt. However, if there's still a balance on your loan after the sale has been completed, the lender may send that portion of the debt to a collection agency if you can't pay it back.
Ways to Avoid Repossession
Because a repossession can have such a big impact on your credit history and score, it's important to take steps early to avoid missing payments on your auto loan and risking default. Here are some things you can do:
- Communicate with your lender. It's in both your and your lender's best interest to find a way to keep you current on your auto loan. Depending on the lender and your situation, this may include a modified payment plan or forbearance, which allows you to pause payments for a few months while you get back on your feet.
- Refinance your loan. If possible, you may be able to refinance your loan through another lender and ask for a longer repayment term. While this means you'll end up paying more in interest over the life of your loan, it could help you reduce your monthly payment to a more affordable level.
- Ask for help. Loved ones may be willing to help you financially, which could provide the short-term relief you need to keep up with your payments and avoid default. You may also be able to request financial assistance from the government or community assistance programs to cover other aspects of your budget, such as groceries and utilities, allowing you to use that cash flow to make your debt payments.
- Surrender the vehicle voluntarily. If you're getting close to defaulting on your loan and can't find a way to avoid doing so, you may choose to voluntarily surrender the vehicle to your lender. This can not only be a better experience emotionally, but could also be a way to save money on repossession-related expenses.
If you're worried about missing a payment on your auto loan, take steps immediately to try to avoid going down the path toward default and repossession.
Monitor Your Credit After a Repossession
If your vehicle has been repossessed, your credit score will likely take a sizable hit. But while those negative items will remain on your credit report for several years, their influence will diminish over time, especially if you develop and maintain a positive credit history going forward.
As part of that endeavor, monitor your credit regularly to keep track of your score and how different actions affect it. Also, request a copy of your credit report and read through it to pinpoint other areas you may be able to address to improve your credit situation.
Credit score recovery after a repossession can take time, but it can not only make it possible to improve your chances of getting approved for an auto loan in the future but also make it easier to qualify for favorable terms.