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If you're behind on your car payments, your lender may decide to repossess your vehicle. Repossession can not only deprive you of your transportation method, but it can also damage your credit score.
You may be able to avoid car repossession by taking certain steps before things get to that point. Here's what to know about the repossession process and how to avoid it.
How Does Car Repossession Work?
When you finance a vehicle, the lender owns the car and maintains the title until you've paid off the loan in full. If your loan goes into default, the lender may seize the vehicle and sell it at auction to recoup some or all of the amount you owe. And if the lender sells the car for less than what you owe, you may be required to pay the difference.
The timeline between when you miss your first payment and when you're considered to be in default can vary from lender to lender. With some, it can take months, while with others, it can happen as soon as you're 30 days past due. Your loan contract should provide information about how your lender defines default, so be sure you understand it if you're worried you may default on the loan.
Repossession laws vary by state, so if you believe there's a possibility your car will be repossessed, familiarize yourself with your state's laws surrounding the process.
How to Avoid Repossession
Having a car repossessed can have a devastating impact on your finances. If you commute, for example, it can make it difficult to get to your job. The damage to your credit score can also make it challenging to qualify for credit in the future.
As a result, it's crucial that you understand the different ways you can avoid repossession.
Communicate With Your Lender
As soon as you think you might miss a car payment, reach out to your lender to discuss your options. Repossession is a costly process, so keeping your loan in good standing is a better option for both you and the lender.
Depending on your situation and your lender, options may include a modified payment program, paused payments through forbearance and more.
Refinance Your Loan
Refinancing your auto loan with a different lender may be worth considering if you're behind on payments and repossession is a real possibility. When you refinance, your new loan will be used to pay off the existing one, and you'll start with a clean slate.
Just keep in mind that if you expect to continue to miss payments, refinancing is just a Band-Aid and won't help you with long-term payment problems. Consider it only if you're confident you'll be able to make your payments on time going forward.
Reinstate the Loan
If your loan is in default, but the lender hasn't seized your vehicle yet, you may be able to reinstate the loan by getting caught up on payments. Even if you live in a state where the law doesn't provide the right of reinstatement, your lender may allow the option to avoid further costs.
Sell the Car Yourself
If you sell the vehicle on your own, you may be able to get more money than what the lender would get if it sold the car at auction. Depending on the car's value and how much you owe, you may even get enough to pay off the loan in full.
This option may also provide you with enough cash to put a down payment on a new vehicle or resolve your other financial concerns, so a car payment won't be an issue in the future.
Surrender the Vehicle Voluntarily
If you've explored all other options and can't find one that works for you, surrendering the vehicle voluntarily will still hurt your credit score, but not as much as a repossession. With this option, you take the car to the lender instead of waiting for them to come to you.
Plus, if you owe more than the car is worth, a voluntary surrender may give you some bargaining power in waiving or reducing the amount you owe after the lender sells the vehicle.
What Are Your Rights When It Comes to Repossession?
Most states allow a lender to seize a vehicle at any time without notice, as long as it doesn't do it forcibly, through the threat of force or by removing it from a closed garage without permission.
Some states require lenders to give you the time and place of the auction where they plan to sell the vehicle, so you can potentially buy it back. Depending on where you live, you may also have the right to reinstate your auto loan by getting caught up on past-due payments and paying the lender's repossession fees.
Make sure you understand your rights in your state when it comes to vehicle repossession. If a lender or the company it hires to complete the seizure violates your rights, the lender may be required to pay a penalty and compensate you for property damage or bodily injury. It may also work in your favor as a legal defense if the lender tries to sue you for the deficiency amount.
How Does a Repossession Affect Your Credit?
Repossession is an indicator that you didn't pay your auto loan as agreed, and thus can have a significant negative impact on your credit score.
A repossession can remain on your credit report for up to seven years from the original delinquency date. In addition to the repossession, other negative items may be added to your credit report, including the late payments that led to the repossession, default and more.
If there is a deficiency balance (the difference between what you owed on the car and what the lender was able to get for it at auction) and you can't pay it, that amount may be sent to a collection agency, which can damage your credit score further.
A lower credit score could result in denial of credit, higher interest payments on loans and credit cards, higher auto and homeowners insurance rates, and more. As such, if you can manage to avoid a repossession, you'll also avoid a lot of potential financial difficulties in the future.
Monitor Your Credit to Maintain a Good Credit Score
Whether or not you've already missed a car payment, it's a good idea to monitor your credit regularly to understand where it stands and how you can improve it. With Experian's free credit monitoring service, you can view your FICO® Score☉ and Experian credit report for free.
You'll also get real-time updates about your current accounts and any new credit inquiries and accounts. If you do miss a payment or you're in default, monitoring your credit can also help as you work to rebuild your credit score. This process can take time, but tracking your progress can help you stay motivated and show you the areas of your credit file that you need to address.