How Does Repossession Work?

Female hand opening a car door

If you have an auto loan, missing payments could cause more than just a ding in your credit history—it could result in you losing your car.

When you finance an auto purchase, the car acts as collateral for the loan, giving your lender the right to take your vehicle should you become delinquent. Repossession happens when your lender or leasing company takes your car away because you've missed payments on your loan—and it can occur without warning if you've defaulted on your auto loan.

Read on to learn how a repossession happens, how it could impact your credit and what to do to protect your car from being taken away.

When Can a Vehicle Repossession Happen?

Repossession can occur as soon as you default on repayment. Your loan contract will define what the lender considers a loan default, but it can be triggered by missing just one payment.

Though a loan contract may give a lender the right to take your car away after you default, the lender will typically will alert you of your missed payments and attempt to collect payment prior to repossessing the vehicle.

When a vehicle owner is in default and is non-responsive to the lender's attempts to remedy the missed payments, the creditor may choose to repossess the vehicle. In most states, the law doesn't require lenders to provide advance notice of a repossession, which means they can come and take your vehicle at any time once you're in default.

Repossession could also occur as a result of not having proper insurance for your vehicle. Though at least basic auto insurance is required in all states, if you allow your insurance policy to lapse, your lender may consider this a reason to repossess your car. Lenders have an interest in protecting their investments, and since they hold your vehicle as collateral for your loan, a car without insurance poses potential risk.

How Long Does a Repossession Stay on Your Credit?

Repossessions are considered derogatory marks and typically remain in your credit file for seven years from the date you stopped paying your loan. Repossessions—like bankruptcies and collection accounts—are red flags in credit reports and can have a serious impact on your scores.

In addition to the repossession being listed in your credit report, failing to pay your auto loan on time may trigger other negative marks in your credit. For each month you are 30 or more days past due, the lender can report the account as delinquent. And if the account was sent to a collection agency, a record of the collection account may also appear in your reports.

On its own, a repossession can cause your score to plummet. Combined with the additional negative dings, a repossession could cause years-long damage to your credit that may hamper your borrowing abilities in the future.

Finally, it's important to remember that even after a repossession, you may owe what's called a deficiency balance. This is any loan amount left over after a lender liquidates your collateral (in this case, usually by selling your car at auction). If your outstanding loan balance is more than the lender is able to get for your car, you will be on the hook for the remaining amount.

What to Do if You're in Danger of a Repossession

Depending on the details of your loan agreement, you could be in danger of repossession after missing just one payment. The best course of action is to make all your payments in full and on time to avoid possible repossession.

In the case you do fall behind and risk repossession, here are a few things you could do in advance of losing your car:

  • Contact your lender. If you do fall behind on your auto loan, reach out to the lender to discuss what options you may have. There is a chance your lender will allow you to defer your loan payments for a period of time or help you come up with another solution to allow you to keep your car. Communicating with your lender—ideally before you miss a payment—shows good faith as you try to remedy your situation.
  • Refinance your car loan. If you're struggling to pay your auto loan, refinancing may help get your payment to an affordable level so you can continue to pay on time. Refinancing entails paying off your current auto loan with a new one, ideally at a lower interest rate. If approved for a new loan, refinancing could help you avoid repossession by satisfying what you owe on your existing loan and starting fresh with a new lender.
  • Consider a voluntary surrender. If you're notified in advance of a repossession and can't find a way to cover your outstanding balance, consider voluntarily turning the car over to your lender. Voluntarily surrendering your car could help you avoid the stress of repossession, and may be slightly less negative on your credit report.
  • Know your state's law. If you live in a state where the law requires lenders to notify owners before a repossession, you may receive a warning prior to your car being taken away. Most state laws also require lenders to follow specific processes, such as notifying you after the repossession and alerting you when they plan to sell the vehicle. It's helpful to know your state's laws to make sure your lender is following all the correct legal steps. To find more information about repossession laws in your state, check with your state's attorney general's office.

If you've recently had your car repossessed or expect it might happen in the future, consider getting a free copy of your credit report and FICO® Score from Experian to see how the repossession has impacted your credit.