If you get too far behind on your car loan, it is in danger of being repossessed. The fallout from repossession, both for your current finances and your future ones, can be devastating.
An average 2.2 million personal vehicles were repossessed in the U.S. in 2021. That’s 5,418 vehicles a day.
When the tow truck drives away with your vehicle, that’s just the beginning of a complicated and expensive process, both if you want to get it back or if you want to get another vehicle. Repossession leaves a negative mark on your credit history and damages your credit score. It’s a one-two punch that can cripple your finances and limit your ability to get affordable financing in the future.
A repossession stays on your credit report for seven years, damages your credit score and is a big red flag to lenders.
It’s also possible that your car loan may be turned over to a debt collection agency, which could lead to a lawsuit, wage garnishment, and even more damage to your finances for years to come.
That said, there are ways to avoid repossession, as well as ways to build back your credit and find financial assistance if your car is repossessed.
What Is Repossession?
When you take out a secured loan for an item, like a car, the item is the security. In other words, if you don’t pay the loan according to the terms agreed to, the lender takes the item because your loan is in default. That’s why, when you have a car loan, the lender has possession of your title until the loan is paid off. That’s when the car is truly yours. Until then, the lender owns your vehicle, with an agreement that you can use it as long as you make on-time payments.
Cars aren’t the only things that are repossessed – homes may be foreclosed on, which is a form of repossession. Furniture, jewelry, art, or anything else that’s used to secure a loan, can also be repossessed.
Still, when people talk about “repossession,” they’re usually referring to a car. To put it in context, the foreclosure rate on home mortgages in 2021 was 0.11% of all home mortgages. That’s way down from 2.23% during the height of the Great Recession in 2010.
The automobile repossession rate in 2021 was 13% of all car loans.
If you are falling behind on your car payments, the best option is to call your lender as soon as possible to see if you can work on catching up. You may want to contact a nonprofit credit counseling agency, which will provide a free consultation in which the counselor reviews your finances and discusses debt relief options that could also help you catch up on payments.
How Repossession Works
Technically, as soon as a loan or credit account is delinquent, the lender can take action to repossess the property tied to the loan. Lenders can repossess a vehicle without notice. Generally, cars are repossessed once payments are 90 days in default, though technically they can do it with one missed payment. Lenders do not need a court order to start the repossession process – they can shift into gear as soon as you miss a payment.
Lenders would prefer not to repossess your car. It usually only nets them 30% of the loan value. But it’s a last resort for them when they believe you will not pay your loan.
A lender will usually let you know you’re in default and your car may be taken away, but you won’t get a heads’ up telling you the repo man is on his way.
Lenders typically contract with a third-party company, usually a towing service, that specialize in repossessing vehicles. These companies are good at what they do, and your car may disappear from the street in front of your house, the parking lot at work or any other number of places.
Rules vary from state to state (in most they can take your car from your driveway but not your garage), but in general they can’t “breach the peace,” which means:
- They can’t take it from your garage without consent
- They can’t disturb neighbors
- They can’t use physical force, or threaten it
Once the property is seized, it is difficult, if not impossible, for the borrower to reverse the situation. Some states allow you to redeem, or reinstate, your car loan. This means you have a certain period of time – usually a few days or a week – to get caught up on payments and pay other fees the lender imposes. You also will have to pay the towing company a storage fee, cleaning fee and more.
If you don’t live in one of the states that allow this, or can’t catch up, the lender charges off the account and may go to court to pursue the borrower for any leftover amounts due, also called the “deficiency.”
Repo Laws and Regulations
Car repossession laws and regulations vary by state, and sometimes even within states. Most of the differences are when a loan is considered in default, where on your property a repo company can go to seize your car, and what steps you can take to get your car back after repossession.
The terms of your loan, your state attorney general (or consumer advocate) webpage or your state’s legal assistance agency should have information on your state’s specifics. It also may help to consult an attorney to help determine what your options are.
Despite state differences, the federal Dodd-Frank Act prohibits service providers from committing unfair, deceptive, or abusive acts or practices that protect you from repossession if:
- Your loan is current, even if there was a prior delinquency
- You entered into an agreement to extend the loan to avoid repossession
- You followed instructions the company said would result in avoiding repossession
- You have filed for bankruptcy, and thus are protected by an automatic stay
- Your payments are being processed in a different order than what you’ve been told, resulting in the appearance of late payments
- The company charged unlawful fees that pushed your account into default.
If your car is repossessed:
- The company can’t withhold personal property found in the vehicle and cannot charge an upfront fee for you to recover the property (for instance your purse, laptop, glasses, baby seat, etc.).
- The company can’t damage your car, or any other personal property (like your garage door) while repossessing the vehicle
- The company can’t charge for collateral protection insurance after a vehicle is repossessed.
Members of the military have added protection. The Servicemembers Civil Relief Act requires a lender to get a court order before repossessing a vehicle belonging to an active-duty service member.
Types of Repossession
There are two types of vehicle repossession: voluntary and involuntary. Both are similar in that the lender takes back your car because you can’t pay, and then sells or auctions the car, with you responsible for the balance left over after the sale (which is called a deficiency balance).
Involuntary repossession means that the lender is seizing your vehicle because you are behind on payments. You likely won’t know when this will happen – the repo man will show up and take your car. You will be charged fees by both the lender and repossession company.
Voluntary repossession means that you have let your lender know you can no longer afford to pay, and reached an agreement to give the vehicle back. One advantage to voluntary repossession is that you can make provisions for when you will give up the car and not be left suddenly high and dry. You also will pay less in fees, including the impound lot fee and other costs that come with an involuntary repossession.
How Repossession Affects Your Credit
If your car is repossessed, your credit score will take a big hit that will have a negative effect for years to come on your ability to get credit, loans and more.
Since repossession means that you defaulted on your auto loan, you’ve triggered several financial red flags that hurt your credit individually. Collectively, the damage to your credit is even worse. These include:
- Late payments – one of the biggest factors in determining credit score
- The repossession itself
- The loan going into collections
- Possible court judgment
Repossession may also hurt your ability to get loans in other ways. For example, some loan programs for low-income earners with less than good credit scores will have provisions that flag car repossession as something that will keep you from qualifying for the loan. A car repossession signals to lenders that, as a borrower, you allowed one of your most important financial obligations to crash and burn. That tells them you may be a bad risk for any other kind of loan or credit.
How to Avoid Repossession
It’s not only in your best interest to avoid a car repossession, it’s also what your lender wants. Repossessions cost a bank money, since cars lose value so quickly. The lender would rather that you continue to pay the loan.
- Talk to your lender: Don’t wait until you’ve missed several payments. Make contact as soon as you know you’re in trouble. You may be able to work out a way to catch up. Be upfront about when you think you can pay and whether it’s a long-term or short-term problem. The lender won’t judge you. They want to know and will appreciate the fact that you are not ignoring the problem.
- Debt consolidation loan: You may be able to find a debt consolidation loan at a lower interest rate than what you are paying on the car loan, or with more affordable payments. This is a more likely option for those who still have a good or better credit score, since that means lower interest rates and better loan terms.
- Refinancing: Your lender may agree to refinance your car loan, or you may find another lender that will. Don’t jump at refinancing before making sure it isn’t for more than your car is worth – in other words you have an “upside-down car loan.” Since the car is worth less than what you owe, if you sell the vehicle, you won’t get enough money to cover your loan balance. If you total the vehicle in an accident, insurance only pays the value of the car, and you will still owe money on the loan. It’s not a good place to be.
- Talk to a nonprofit credit counselor: If your debt challenges are such that a debt consolidation loan is not a good option, a credit counselor will discuss other options with you after reviewing your finances, free of charge. Options may include a debt management plan, debt settlement, or simply reworking your budget and cutting expenses.
- Bankruptcy: If your financial situation is drastic, bankruptcy will save your car from repossession. Filing bankruptcy puts an automatic hold on all court actions. With Chapter 13 bankruptcy, you can make the car part of the repayment plan you present to the court. If you file for Chapter 7 bankruptcy, the creditor is prevented from repossessing the car, but could go to court and receive an order that permits repossession. If you talk to a nonprofit credit counselor, they’ll review the pros and cons of bankruptcy as related to your car loan as well as your other debt.
Recovering from Repossession
If your car is repossessed, there’s no way to avoid damage to your credit and finances. That said, there are ways to possibly get your car back, or mitigate some of the negative financial effects of repossession.
How to get a Repossessed Car Back
If your car has been repossessed, some states allow you to “reinstate” your loan, which means that you pay the past due amount and whatever your lender’s repossession expenses were. Those payments bring the loan current, and you get the car back. It doesn’t remove the repossession from your credit report, but it does get your car back and bring your loan payments up to date.
Some states also allow you to buy back the vehicle by paying the full amount that you owe. This doesn’t mean catching up on missed payments, but paying them as well as the remainder of the loan.
You may also be able to buy the vehicle back when the lender auctions it off.
Repairing Your Credit After Repossession
Repossession stays on your credit report for seven years, and each year it’s on it, it has a little less of an impact.
There are ways, as well, to strengthen your credit even with the repossession still on your credit report:
- Pay off outstanding debt on the car loan. The less you owe, the better your credit score and you won’t have monthly car payments to fall behind on.
- Stay up to date on all of your monthly debt bills, including student loan payments, credit cards, rent and medical bills. On-time payments are a major factor in credit scoring.
- Keep low balances, pay off credit card bills and avoid adding credit card debt. Another major factor in credit scoring is the amount of debt you have vs. the amount of credit you’re allowed. The lower your balances, the better your credit score.
Financial Assistance for Car Repossession
If you are in danger of a car repossession, time is of the essence. Consider contacting a nonprofit credit counselor immediately if you’re concerned that repossession may happen or is already in process. Once completed, repossession is a bell that you cannot un-ring. You will lose a valuable possession and it remains a black mark on your credit history for seven years.
Nonprofit credit counselors are required by law to act in your best interest. Credit counseling is also offered free of charge. Counselors will review your finances, including income and expenses; discuss a budget with you; and review financial assistance options. They’ll go over the pros and cons of debt settlement, debt consolidation, debt management plans and bankruptcy. You will then have the tools to decide what financial assistance option will help you either avoid car repossession, or help your credit and finances recover from it.