Vehicle Repossession

Having your vehicle repossessed is the worst-case scenario for both you and your lender. Although car repossession brings some serious repercussions, fortunately there are ways to avoid it.

What Is Vehicle Repossession?

Simply put, vehicle repossession means your lender or lienholder—whether it's a bank, credit union, or dealership— takes back your vehicle because you've failed to make the monthly payments.

Lenders are able to do this because car loans are security loans; this means the lender grants the loan based on collateral (the vehicle) and can repossess that collateral in the event you don't make your payments.

Generally, car repossession occurs after a series of missing or late payments without any communication or agreements with lenders.

NOTE: Exact vehicle repossession laws vary by state. Consult your State Attorney General or local consumer protection agency for car repossession laws in your state.

Auto Loans and “Charge Offs"

When a loan is “charged off" after a vehicle is repossessed, typically it means the lender decided the loan was uncollectible. In such cases, the lender takes a business loss on the loan.

However, a “charge off" doesn't mean you're off the hook. Your credit score still takes a hit, and the lender can sell the auto loan to a collection agency that will attempt to collect the remainder of the loan (including interest) from you.

How You Can Avoid Repossession

The simplest way to avoid having your vehicle repossessed is to make your monthly payments on time.

However, if you're facing missing or late payments, contact your lender immediately to work out an arrangement. Most lenders are willing to work with you, to an extent, because just as you don't want to lose your car, they don't want to lose out on their auto loans.

Read our Missing and Late Payments page for more information.

What Happens After Vehicle Repossession

Reinstate or Redeem the Auto Loan Contract

In some states (and depending on the lender), it's possible to get a repossessed vehicle back by reinstating or redeeming the auto loan contract. Both options can be costly.

When you reinstate your auto loan contract, you must pay the:

  • Past due monthly payments.
  • Interest.
  • Penalties.
  • Any repossession and storage costs.

When you redeem your auto loan contract, you must pay off the entire car loan, in addition to any repossession and storage costs.

Pay the Deficiency Balance

Unless you reinstate or redeem your auto loan contract, the lender will probably put the car up for auction. Chances are high you'll have to pay a deficiency balance on your repossessed vehicle.

The deficiency balance is the difference between the amount your vehicle sells for and the amount you still owe on the auto loan. Thus, you'll be paying on a vehicle you no longer own.

Paying the deficiency balance is a common repercussion of vehicle repossession.

Repossession & Your Credit Score

Having a vehicle repossessed leaves a nasty scar on your credit history, which, of course, affects your overall credit score. Poor credit scores make it difficult for you to do everything from getting another loan to even landing a job.

Learn more about how you credit score affects your life in our page on Credit Reports.

Voluntarily Surrender Your Vehicle

Voluntarily surrendering your vehicle, also known as “voluntary repossession," works the same way as regular repossession except you're initiating it and, as such, you might be able to avoid the fees associated with vehicle's physical repossession. However, you'll still owe the difference between your current auto loan and what the vehicle sells for, and your credit score will still take a hit.

Just like you would with regular repossession, you should avoid voluntary repossession at all costs. Contact your lender and take all necessary steps to work out a deal.

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