How a Car Repossession Affects Your Credit
You suddenly lost your job and you missed your last car payment. It’s looking like you won’t be able to make next month’s car payment either, and you’re starting to get nervous. When will my car get repossessed? Should I call my lender and explain my situation? How will my credit score be affected by one missed payment?
The basics of car repossession
If you’re falling behind on your car payments, auto lenders will typically reach out to you very early on in the process, likely around the time you are 30 days late, said Bruce McClary, vice president of communications at the National Foundation for Credit Counseling (NFCC). They’ll inquire about your situation and remind you that you’ve missed one payment and are late, he explained.
“They’ll try to work with you to get the account back on track,” he said. “That’s a really good opportunity to explore some of the options you have that can make it easier for you to get back on track if that’s even possible.”
Thomas Nitzsche, a credit educator at Money Management International, a nonprofit financial wellness organization, said that if someone does not make arrangements with his or her creditor to fix the default, repossession typically occurs within 60 to 90 days of the first missed payment, or 90 to 120 days after the last payment was made.
McClary emphasizes that every car repossession situation is unique. “That isn’t a guarantee that at 120 days since your last payment, they’re going to come and hook the tow truck up to your bumper, and take the car out of your driveway,” he said. “But it’s a general expectation, especially if you have not been responding to their attempts to communicate.”
The situation also varies depending on the state you live in and various other factors. “The time frame varies by state law and by creditor policy,” Nitzsche said. “Buy here pay there lenders actually now have the technology to remotely disable the car after the first missed payment.” (Buy here pay there loans involve a consumer financing his or her vehicle through the dealership where the car was purchased.)
Maria Scenna, a marketing specialist with American Consumer Credit Counseling, said to be aware that auto lenders might be more aggressive than other lenders. “Auto lenders are less forgiving than other lenders when it comes to missing a payment,” she said. “They may repossess the vehicle as soon as you miss a payment or otherwise break the agreement, which may include nonpayment of car insurance.”
Consumers are required to carry car insurance to protect the lender. “Defaulting on car insurance can trigger a repossession even if you are paying the loan,” Scenna said.
What are your rights?
The laws depend on the state you live in, but a car repossession typically involves the lender taking the car without “breaching the peace” — that is, threatening to use physical force against you or damaging your property during the repossession, Scenna said. “If they do, you may be entitled to damages or use it to defend against a deficiency lawsuit.”
In addition, Scenna said your lender must return any personal possessions found inside of the car.
After repossession, your vehicle is liable to be sold at an auction. “Each state is different, but you usually have the right to know when and where your car will be sold after a repossession,” Scenna said.
Despite differences in state laws, all collection efforts must be compliant with the Fair Debt Collection Practices Act (FDCPA), McClary said. “However, the repo man himself is not subject to FDCPA so legality at the moment of repossession would fall to state law and the sale/loan contract,” Nitzsche said.
What happens to your credit when your car is repossessed?
After the first missed payment, it is possible (and likely) that your lender will be reporting to the credit bureaus, McClary said, which will have a negative effect on your credit score. A single missed payment could cause your credit score to drop by 100 points or more, he added.
“Not only are you in a situation where there is urgency to get the account up to date from a financial perspective and a contractual obligation with the lender, but there’s also a situation where you’re going to have to think about how you can restore your credit score, because the damage has been done,” McClary explained.
Scenna adds that you still have the ability to make improvements to your credit score after a significant dip. “The negative impact lessens over time, especially if you take steps to rebuild your credit,” she said.
A car repossession stays on your credit report for seven years after the original delinquency date. Even if you do begin rebuilding your credit, Nitzsche said a car repossession is a red flag for future lenders.
The difference between voluntary and involuntary repossession
Voluntary repossession involves giving your vehicle back to the lender or dealership before the vehicle is taken from you. “This may be a less embarrassing and more dignified experience than involuntary repossession, where the lender hires a repo man to locate and pick up the car after you have defaulted on your loan,” Scenna said.
Worth noting, however, is that both forms of repossession have the exact same impact on your credit report: It will still show up as a repossession. But McClary and Nitzsche said that voluntarily giving back your vehicle could prove beneficial in the future.
“If you had extenuating circumstances that caused the default and worked to improve your score after the event, it is possible that a future lender could look at the voluntary repo as a more responsible move when manually reviewing your credit, but that is subjective,” Nitzsche said.
How to avoid a car repossession
Nobody wants his or her car repossessed. It’s a process fraught with stress and embarrassment, not to mention the impact it can have on one’s credit. Here are some steps you can take to avoid having your car taken back by the lender.
Ask your lender to work with you.
McClary emphasizes the importance of openly communicating with your lender in the early stages of a missed payment, as they may be willing to let you skip a payment or make an interest-only payment if you’ve been maintaining your accounts.
“If you’ve been paying on time [and] if you’ve never had any issues with that lender before, and all of a sudden you hit this rough patch, chances are pretty good that they’re going to be accommodating and trying to find ways to keep the account on track, to get you back up to date and to avoid any further collection activity that could lead to repossession,” McClary said.
Sell your car.
If a big life event has put you in financial distress, consider selling your vehicle before a missed payment. If you can manage without a car, you can maintain your dignity and also have a decent amount of cash to help you get through your hard time.
Take a look at your other forms of debt.
If you hold student debt, Nitzsche advises borrowers to consider putting it on a hardship forbearance until your financial situation is improved. And if you have significant credit card debt, he recommends considering creating a debt management plan with a credit counselor to lower the rates and payments.
These methods could incur additional fees or interest but may be preferable to defaulting on your car payments.
Reach out to a nonprofit credit counseling agency.
McClary cannot emphasize the importance of this step enough if you are struggling financially in other areas of your life, too. “A credit counselor with a nonprofit agency — like the members of the NFCC — can help you address the root causes of the financial problem and create a pathway for you to get back on track, and help you through each stage of that process.”
Refinance the car loan.
Depending on your situation, you might be able to refinance your car loan to get one with longer terms and therefore a lower monthly payment. Speak with your lender to figure out whether this option is a good fit for you. And take note of the car’s age and the interest rate on the refinance loan, as refinancing with a higher interest rate might not be the best decision.