Having a car payment can stretch your finances to the breaking point. According to Experian, the average car payment for a new vehicle is $515.
Combined with student loan debt, rent, and other essentials, that high payment can cause you to fall behind. If you become delinquent on your car loan, though, you could face repossession.
But exactly how does a repossession affect your credit? It can have a significant impact, so it’s important to know how severe a repossession is and what you can do to repair your credit.
What is car repossession?
Your car is one of the most essential — and expensive — things in your life. It gets you to work, allows you to take your kids to school, and helps you complete your errands faster than if you relied on public transportation.
But the cost of owning a car can be high. You might even have trouble keeping up with your payments. If that sounds like your situation, you’re not alone.
According to a Federal Reserve Bank of New York report on household debt and credit, auto loan delinquencies are on the rise with 4.1% of auto loan borrowers being 90 or more days behind on their payments. That means millions of people could face auto repossession.
When you don’t make your payments on time, your lender can repossess the car and sell it at auction to recoup the value of the vehicle. Although each state has its own laws about repossession, lenders in general can seize your car as soon as you miss a payment.
They might not even have to give you a warning or get a court order. Lenders can send repossession companies to your home or workplace to collect the car.
How does a repossession affect your credit and finances?
If your lender repossesses your car, you’re not off the hook. The lender can send you to collections, and you could face severe consequences.
If you’re facing car repossession, this is what can happen to your credit and finances.
You might be responsible for the deficiency
When your lender seizes your vehicle, it sells it at auction to try to get back some money. If the car sells for less than what you owe on the vehicle, the remainder is known as the deficiency. In most cases, you’re responsible for paying off the deficiency and any other fees.
For example, if you had a car loan with a balance of $10,000 but the lender sold your car for just $7,000, you’d have to pay the lender the remaining $3,000.
It can stay on your credit report for up to 7 years
Going through repossession can haunt you for years. According to Experian, negative account information such as missed payments can remain on your account for seven years. A repossession is a severe blemish on your credit report.
Your credit score will go down
A car repossession can ruin your credit history and could plummet a good credit score overnight. How much your credit score drops depends on your unique situation, but a decrease of 100 points is not uncommon.
It might be difficult to get other forms of credit
When a car repossession appears on your credit report and your credit score drops, lenders take that as a red flag. They view you as a high-risk borrower since you already defaulted on one loan.
Your tarnished credit report can make it more difficult to get other forms of credit, such as a mortgage. Even finding a personal loan lender or credit card company willing to work with you can be challenging, so you might have to rely on just cash until your credit improves.
How to repair your credit
Although a car repossession is serious and has long-lasting repercussions, you’re not stuck with bad credit forever. There are five ways you can repair your credit:
- Find out if loan reinstatement is possible: In some cases, you can get your car back and minimize the damage to your credit report by reinstating the loan. To do so, you must pay the past-due monthly payments, interest, penalties or late fees, and any repossession or storage costs.
- Redeem the car if possible: If you can find the money, either by emptying savings or asking friends and family for help, you can limit the impact on your credit score by redeeming the car. That means you buy back the vehicle by settling all your past-due payments, as well as the remaining balance of your loan.
- Pay all your bills on time: Making your payments on time is the single biggest contributing factor that determines your credit score, accounting for 35% of your score. You can protect your credit from further dips by making sure you make every payment on all your debt and other obligations by their due dates.
- Shop around for a secured credit card: If you can’t qualify for a regular credit card, you can rebuild your credit by using a secured card. With a secured card, you borrow against yourself. You deposit a set amount, and the money you deposited is your credit limit.
- Consider a credit-builder loan: Applying for a credit-builder loan can help you establish good credit. With this type of loan, the money doesn’t come to you right away. Instead, you make regular monthly payments. At the end of the loan term, the lender releases the money to you. Each payment is reported to the credit reporting agencies.
Getting back on track
How does a repossession affect your credit? Beyond losing out on transportation, repossession can have significant consequences that plague you for years. But by focusing on managing your finances responsibly and improving your credit score, you can minimize the damage and get back on track.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|