How to Avoid and Handle Car Repossession

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Understanding Repossession and How to Avoid It

If you have an auto loan, missing payments could lead to more than just a negative mark on your credit history—it could result in losing your car. Repossession occurs when your lender or leasing company takes your vehicle away due to missed payments. This can happen without warning if you’ve defaulted on your auto loan. If you’re concerned about repossession, here’s what you need to know about the process.

What Is Repossession?

Repossession happens when a lender or leasing company seizes your vehicle for nonpayment. When you take out a car loan, the vehicle acts as collateral to secure the loan, meaning the lender technically owns the car until you pay off the debt. With a lease, you’re essentially renting the vehicle for a period of two to four years. Lenders and leasing companies can repossess your vehicle as soon as you miss a payment, but it typically happens once you’re 90 days past due. The lender or leasing company will then sell the vehicle at auction to recoup the remaining loan balance or the vehicle’s value.

How Does Car Repossession Work?

The repossession process can vary depending on your lender or leasing company, and each state has different laws regulating repossession. However, there are some general things to know about how repossession works.

Types of Repossession

Repossession is generally involuntary, meaning the borrower doesn’t have a choice. However, if you’re behind on payments, you can opt for voluntary repossession, where you turn in the car to the lender or leasing company on your own accord. Voluntary repossession can help you avoid some costs related to involuntary repossession and may make you look better to future lenders.

Your Vehicle Is Seized

There’s no legal requirement for a lender to notify you before seizing your vehicle. Some states allow lenders to install a “kill switch” in the vehicle, preventing you from starting it and making the repossession process easier. However, they can’t “breach the peace,” such as using physical force or removing the vehicle from a closed garage without your permission. Repossession can come with various fees, such as storage, sale preparation, attorney fees, prepayment penalties, and early termination of the lease.

The Lender Sells the Vehicle

Once the lender or leasing company has possession of the vehicle, they may choose to keep it or sell it privately or at a public auction. In some states, the lender is required to tell you where the auction will be held, allowing you to bid on it. You may also be able to buy back the vehicle in a private sale or reinstate your loan.

You Pay the Deficiency Balance (When Applicable)

If the lender or leasing company doesn’t get enough from the sale to cover what you owe, including repossession-related costs, you’ll have a deficiency balance. If you can’t pay the amount, some states allow the lender to sue you to collect the debt. In contrast, if the sale proceeds exceed your remaining loan balance plus repossession-related costs, some states require the lender to disburse the surplus amount to you.

How Long Does Repossession Stay on Your Credit?

Repossessions remain on your credit reports for seven years from the date you stopped paying your loan. Late payments, default, and repossession can significantly damage your credit score, even if you voluntarily surrender the car. If the lender sends the deficiency balance to collections, the collection account will also show up on your credit reports, further harming your credit profile. However, the impact of a repossession can diminish over time, especially if you develop good credit habits and establish a positive credit history.

How to Avoid Repossession

The best way to avoid repossession is to make all your payments in full and on time. If you’re in danger of missing a payment, here are some steps you can take:

• Be upfront with your lender: Let your lender know you’re struggling. The repossession process can be costly, and your lender will likely be willing to help you find a solution.
• Request forbearance or loan modification: Depending on your lender’s options, you may be able to get a short-term forbearance or a long-term modification to your monthly payments.
• Get caught up as quickly as possible: If you’ve missed a payment or two, prioritize getting current on the loan. Consider asking loved ones for help or seeking financial assistance.
• Sell the vehicle: If you can afford a lower monthly payment, consider selling the vehicle or returning the lease early and getting a less expensive vehicle.
• Refinance your loan: If your credit is still in good shape, you may be able to refinance the auto loan for a lower interest rate or extend your repayment term.
• Consider a voluntary surrender: If you can’t cover your outstanding balance, consider voluntarily turning the car over to your lender to avoid the stress and costs of repossession.

What to Do if Your Car Is Repossessed

If your lender has decided to seize your vehicle, here are some steps you can consider:

• Know your state’s laws: Most state laws require lenders to follow specific processes, such as notifying you after the repossession and alerting you when they plan to sell the vehicle.
• Retrieve your personal possessions: Ask about how to retrieve your personal belongings—they aren’t allowed to keep or sell your personal property.
• Try to reinstate the loan: You may be able to reinstate your loan or lease by paying off your past-due payments and repossession expenses.
• Consider buying back the car: Depending on where you live, you may be able to buy back the vehicle if you can afford it.
• Reevaluate your financial situation: Take stock of your financial situation and determine whether you can make changes to your budget or if you might need credit counseling.
• Take steps to improve your credit: Check your credit score and report to understand where you stand and take concrete steps to rebuild your credit.

The Bottom Line

Vehicle repossession can drastically impact your credit score and finances, so it’s important to try to avoid it at all costs. If you’re at risk of falling behind on payments—or you’ve already missed one or two—consider steps to avoid repossession. If your lender or leasing company has already seized your vehicle, think about the different paths you can take to reinstate your loan or lease, buy back the vehicle, or move on and improve your credit. Throughout the process, monitor your credit score to understand how your actions impact your score and track your progress as you take steps to improve it.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with confidence.

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