How Does a Repossession Affect Your Credit?

Tow truck towing a broken down car on the street

If you fall behind on your car payments, the consequences can be dire. Your loan could go into default, at which point the lender has the right to repossess your vehicle.

No one wants a visit from the repo man, but the trauma and drama of having your car taken away is only one piece of the problem. An auto repossession can negatively affect your credit in numerous ways. It also can be costly and disruptive—with effects that may linger for years to come. Here's what you need to know.

What Is an Auto Repossession?

When you finance a car, your lender retains a security interest: They hold title to the car until the loan is paid off. Under the terms of your loan contract, your lender can take possession of your car if you fail to make your monthly payments as agreed and default on the loan. Your loan contract spells out exactly when default occurs but, practically speaking, most banks and credit unions won't start the repossession process until at least 60 days have elapsed since your payment was due.

Different states have different laws regarding repossession. Check with your state attorney general's office to learn about the laws that apply in your area. Many states require lenders to notify you in advance if your vehicle is about to be repossessed. And many don't allow lenders to "breach the peace" when taking your vehicle: They can't damage property or use physical force. You are also entitled to any personal property left in the vehicle.

The lender has a right to keep or sell your car, but typically they'll sell it and apply the money they get to your outstanding loan balance. If your car does not sell for enough money to cover your debt and the cost of towing, storage and any other fees or expenses that have accrued, you will owe the difference—known as a deficiency balance.

What Happens to Your Credit Score After a Repossession?

A repossession will have a serious impact on your credit score for as long as it stays on your credit report—usually seven years, starting on the date the loan stopped being paid. But in addition to the repossession being noted, this process often includes the following "dings" to your credit:

  • Late payments: For every month you miss a payment, there's a negative item on your report.
  • Defaults: Entering loan default is its own negative event.
  • Collections: If you are unable to pay off a deficiency balance, your account may be sent to collections, which will also be noted on your credit report and hurt your credit score.
  • Court judgments: Unsuccessful collections may result in a court judgment.

Credit scoring is complex, so it's impossible to pinpoint exactly how many points your credit score will drop in the event of a repossession. But, given the multiple hits to your credit and the fact that payment history is the single most influential factor in calculating your credit score—accounting for 35% of your FICO® Score —the impact will be substantial. Each of the items listed above stays on your record for seven years, although their impact lessens as time goes by.

Damage to your credit can make it more difficult for you to secure loans and credit going forward. That's a particular challenge if you need to replace your repossessed car with another financed vehicle. You may be able to get a car loan after a repossession, but expect to have a harder time finding a lender and be ready to pay higher interest on the loan.

How to Avoid Vehicle Repossession

It's far better to avoid repossession than to deal with its aftermath. The most important step you can take if you're worried about—or are in the midst of—a repossession is to communicate with your lender. As soon as you realize you're going to have trouble making your car payment, take a few proactive steps. Try to figure out why this is happening and how you might resolve your difficulties:

  • Is this a one-time event or a recurring problem?
  • Do you have the money to bring your loan current? Can you make the remaining payments on time?
  • Would it help to skip a payment or two?
  • Would it be better to restructure and get lower payments for the remainder of your loan?
  • Should you consider ending your loan contract?

The sooner you call your lender, the better your chances of negotiating a deal that minimizes damage to your credit and your finances. A temporary cash flow issue might be resolved with a deferment, which allows you to skip one or two monthly payments without triggering a default or repossession. You'll still be on the hook for the money, but the payments—including interest—are added on to the end of your loan.

If your credit is still good and you can demonstrate the ability to make future payments, you may be able to negotiate a modified payment plan for the remainder of your loan. Any change to your original loan agreement—including a deferment or a new payment plan—should be documented in writing to avoid confusion over skipped or modified payments in the future.

Here are few additional alternatives to consider:

  • Sell your car. If you simply can't afford your car payments anymore, one option is to sell your car, preferably before late payments become a repeat issue. You may be able to raise enough money to pay off your loan entirely, and have money left over to put toward a new, less expensive car. Even if you don't get enough to cover your loan balance, you may recover more money than your lender would if your car was sold at auction, while also saving yourself the cost and trouble of a repossession.
  • Refinance your loan. While your credit is good, you may be able to refinance your loan balance with another lender. Lower interest rates or a longer repayment term could help make the remainder of your loan more manageable.
  • Consider a voluntary surrender. If giving up your car is unavoidable, you may want to voluntarily give your car over to the lender. A voluntary surrender still shows up on your credit report, with nearly the negative impact of an involuntary repossession, but it may allow you to salvage your pride and a bit of good grace from your lender. You may also save a few dollars by not requiring the services of a tow truck.

How to Improve Your Credit After Repossession

Rebuilding your credit after a repossession takes time. In most cases, it's a matter of paying down debt, paying balances off on time and being conservative about taking out new loans or credit. As the repossession becomes more distant, its impact will decrease: Credit scoring models tend to favor new information over old.

Monitoring your FICO® Score for free and credit report regularly can help you keep track of your progress. Your repossession and any late payments and collections that went with it will be automatically deleted after seven years. At that point, they will no longer affect your credit score.