Repossession can occur with any secured loan which requires you to provide collateral as an assurance that you will repay the loan. Vehicles are commonly repossessed when borrowers can’t make their payments. Car loans often use the car as collateral and if you fail to make payments they will repossess the automobile to mitigate the loss. In the United States, 5,418 vehicle repossessions occur each day. Repossession not only leaves you without a vehicle, it has a major effect on your credit score because it often results from a series of missed payments and failure to pay back a loan.
How Repossession Affects Your Credit Score
Repossession will dramatically lower your credit score. Your credit score will go down each time you miss a payment or make a late payment. Lenders often wait until it seems like you won’t be able to make the payments before repossession, so there are often a series of missed payments that are reported to the credit bureau. Repossession also involves defaulting on your loan which is another negative item on your credit score. By not being able to pay off a deficient balance, your account may be sent into collections. This also negatively impacts your credit score. Unsuccessful collections could potentially result in a court judgement.
The calculation of a credit score is rather complex, so the number of points that your score will drop due to repossession will vary based on your credit history. Payment history is the most influential factor for calculating your credit score and accounts for 35% of the FICO® Score☉. Because missing payments is a major aspect of repossession, the impact of a repossession on your credit score will be substantial. Your credit score will remain lower for as long as the repossession stays on your credit report. This is typically seven years from when the loan stopped being paid.
The damage that is done to your credit will make it hard to secure other loans in the future. If you need to replace your car with a financed vehicle, getting another car loan will be very difficult. While it is possible to obtain a car loan after a repossession, many lenders won’t work with someone who has had a repossession. You may also end up paying a higher interest rate on the loan.
How to Work With Lenders to Avoid Repossession in the Future
Even if you can’t make the full financial payments, there are some things that you may be able to do to avoid repossession. Avoiding repossession will help to reduce the negative impact on your credit and allow you to keep your vehicle. These five strategies will help you avoid repossession:
Communicate with your lender
When you think you may miss a payment, contact your lender to discuss payment options. Because repossession is so costly, keeping your loan in good standing is better for the lender and you. The options may include a modified payment program or paused payments.
Refinance your auto loan
If you are behind on your payments, you may be able to refinance your auto loan with a different lender. Your refinance loan is used to pay off the existing one and provide you with a clean slate. You may be able to negotiate terms that fit your budget better. Just remember that you can’t miss payments on your refinanced loan. Only consider this option if you are certain you’ll be able to make the payments on time.
Reinstate the loan
If your lender hasn’t seized the vehicle, you may be able to work with your lender to reinstate the loan by getting caught up on your payments. Lenders may allow this option to avoid further costs.
Sell your vehicle
If you sell your car on your own, you may be able to get more money for it than the lender would if they sold the car at an auction. Selling the car yourself is helpful if the car’s value is greater than how much you owe because you may be able to get enough to pay off the loan in full. If the car is worth enough, you may be able to sell it and have enough money for a down payment on another car.
Voluntarily surrender the car
If the other options don’t work, you may surrender the car voluntarily. This will still damage your credit score, but it won’t lower it as much as a repossession. Take the car to the lender instead of waiting for them to repossess the car.
You can avoid repossession by creating a financial plan that works for your budget. A sound money management strategy will help you stay current on your loan payments. You may want to use a money management app like Thinkflow to track your spending and ensure that you are prioritizing you loan payments. If you’re still in need of an emergency cash to prevent a repossession, consider a short term emergency loan from Jora Credit today.