How Car Repossession Impacts Credit Scores

Falling behind on your vehicle loan puts you at risk for repossession. If this happens, not only will you lose your car but you’ll also impact your credit score.

Vehicle repossession occurs when you have fallen behind on your car loan payments or have failed to pay your auto debt altogether. The delinquency on your account entitles the lender to take the vehicle. People who are behind on their payments may also choose to voluntarily surrender their vehicle to the lender, but that is still considered repossession.

According to Equifax data, there were more than 70 million outstanding auto loans as of the fourth quarter of 2014.

In order to understand the impact repossession has on your credit score, you should understand how it typically occurs.

What happens when your vehicle is repossessed?

The specifics of repossession will depend on both the terms of your loan agreement and the laws in your state. Generally, an auto lender is required to give a final notice or opportunity for you to pay back the delinquent debt before the car is taken. Some lenders may even give a grace period. If you do not pay the debt, however, your car can be taken back by the lender and sold in a general sale or auction to recoup the lender’s loss.

If the sale of the vehicle does not cover all of the delinquent debt, you may still be responsible for the rest of the loan. This is called the deficiency balance. In order to collect this remaining balance, the lender has the right to place a court judgment against you. It also may choose to sell your debt to a collection agency, which will then attempt to collect the debt (possibly including late fees or interest payments).

How can vehicle repossession impact your credit score?

Failing to pay your vehicle loan may impact your creditworthiness because it indicates to future lenders that you may have difficulty repaying your debts. A repossession may remain on your credit report for up to seven years.

If there is any deficiency balance remaining, that may also show up on your credit report and impact your credit score. Additionally, if the lender places a judgment against you or sends your debt into collections, that information may also appear on your credit report.

Keep in mind that a voluntary surrender may still be considered as a negative item.

Working through vehicle repossession

If you have missed car payments and fear you could be on the brink of repossession, communicate with your lender. Some lenders may consider working out a restructure of your loan, payment deferment, or other payment options to help you get back on track. Remember to get any agreements in writing.

If your car has been repossessed, you may want to try to pay the deficiency balance as soon as possible. You may be able to work out a payment agreement with your lender to pay this amount.

It may take some time to get your credit history back in order after vehicle repossession. In the meantime, develop some good credit habits, such as paying all your bills on time and creating a plan to pay back any outstanding debt.