How a Car Repossession Affects Your Credit
If you default on a car loan, your lender could repossess your car. Not only will you be without a set of wheels, but your credit score will also fall along the way. Missing loan payments, defaulting on a loan and having the debt go into collections all hurt your credit.
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How does a car repossession affect your credit?
Lenders look at your credit score and credit report to evaluate your creditworthiness (in other words, your ability to pay your debts). A car repossession indicates you didn’t keep up with your auto bills, so it hurts your credit at each step of the repossession process. Together, these issues can decrease your credit score significantly.
Missing your loan payments
Missing car payments can hurt your credit score. Your payment history is one of the most important factors making up your score, and missed payments can stay on your report for up to seven years.
Defaulting on your auto loan
When you miss too many loan payments, the loan goes into default and likely will be sent to collections eventually. When your debt goes to collections, it shows up on your credit report, and your score can take a big hit.
Having your car repossessed
When a secured loan — like an auto loan — goes to collections, debt collectors reclaim the asset used as collateral. For mortgages, those assets are homes, and for auto loans, those are cars. Car repossession can also stay on your credit report for up to seven years.
How to avoid car repossession
If you avoid repossession, it can help preserve your credit score. Ultimately, these outcomes would be better for your credit history than having your car repossessed in collections.
Negotiate a payment plan. Some lenders may allow a little flexibility when making payments if you’re in danger of falling behind. In addition, you may be able to refinance your auto loan for more affordable terms, depending on how much of the original balance you’ve already paid.
Sell the car yourself. If you know you’re at risk of being unable to make your payments on the loan, you might be able to pay off the loan if you sell the car. You won’t be able to pay down the loan’s value as much if your car is repossessed and sold by the debt collector.
Voluntarily surrender the car. If your loan is in default, you could voluntarily surrender the car to your lender or the debt collector working on its behalf — your credit score would still be impacted, but maybe not as much as it would be by an involuntary repossession.
Find cheaper transportation. If you can’t afford the car you’re driving, finding alternative transportation — a cheaper car, a bike or public transit, perhaps — can help your finances and your credit score over the long run.
Why lenders can repossess your car
It’s common for lenders to secure loans given on big purchases by using those assets as collateral to offset the risk of the borrower potentially being unable to repay the loan. Mortgages and auto loans are common types of secured loans.
When your car loan goes into default, lenders will seek to recoup as much of the value of the loan as they can. Often, that means contracting a debt collector to repossess the car so they can sell it themselves and use that money to pay off the amount of the loan that was in default.
Sometimes, the car’s value is less than the outstanding amount of the loan — plus, there could be other expenses related to the debt collection process. In that case, you’d still owe the lender money even after it repossesses your car.
How to fix your credit after a car repossession
Negative events like a car repossession can stay on your credit report for a long time, and there’s no easy fix for credit repair. But, if you stay the course and practice good credit habits, you can start improving your credit. Eventually, those negative marks could go away.
Reclaim your financial health. You may feel discouraged after a car repossession, but don’t give up and ignore your other debts. Prioritize your bills and monitor your cash flow so you can stay on top of what else you owe.
Make timely payments. Paying your bills on time moving forward is essential for building and maintaining a good credit score. A history of on-time payments will improve your credit. Even a single missed payment can hurt your score.
Don’t use all your credit. Lenders like to see that you’re using some of your credit — but not too much. You should target a credit utilization ratio of less than 30%. If you’re consistently using more than 30% of your credit limit, your score can decrease.
Dispute credit report errors. Make sure to check your free credit report every so often, especially if your credit score is lower than you expected. Sometimes contacting the credit bureaus to fix credit report errors can help your score recover.
Frequently asked questions
An auto repossession can stay on your credit report for up to seven years. Unfortunately, there are no shortcuts for removing the negative event.
A voluntary surrender can generally be better for your credit score and debt repayment if you’re at risk of having involuntary repossession of your car.
Depending on how much you owe, the value of your car could cover the remaining balance of your auto loan. But if it doesn’t, you’ll still be on the hook for the remaining amount.
You will still be able to buy vehicles after you’ve had a car repossessed, but you might not be able to get an auto loan if lenders look at your credit history and decide not to approve you. Rebuilding your credit will be an important step to affording and owning your next car.