Repossession might feel like an insurmountable obstacle to getting another car. It’s important to realize that you can repair bad credit. Working to reach a healthy financial situation after a repossession means that even this unpleasant experience will move into the past.
If you don’t make payments on your car loan, you’ll eventually face repossession. While this is not a pleasant event, you can recover from the experience and buy a new vehicle. Repossession will leave its mark on a credit report, but there are ways to finance a replacement vehicle and to get yourself back on track.
Before you sign on to take out a new loan after a repossession, take the time to learn your rights and options. You may not get the best loan rates, and you will want to take steps to prevent future money-related struggles.
How Repossession Works
If you purchase a vehicle, you own it, even if you took out a loan to buy the car. But, if you stop making the payments on that vehicle, the lender can take your car back through a process called “repossession.” The number of payments you can miss before the lender sends someone to repossess your vehicle will vary.
In most places, you’ll receive a letter warning you that you defaulted on the loan payments. Some states will allow the lender to take the car even without giving you notice before the repossession. Once the lender has your car, they will sell the vehicle in a public auction. The money that the lender recovers by selling that vehicle will help them offset the losses from your missed payments.
Unfortunately, the auction probably won’t recover enough to pay off the auto loan balance along with all of the repossession expenses the lender incurred. The lender will come after you to collect the difference between the auction price and the balance that you owed.
How to Get Your Repossessed Car back
There are several ways that you might be able to get back your repossessed car. Those methods include redeeming the vehicle, reinstating the loan, and repurchasing the car at auction.
When the lender repossesses your vehicle, they will likely send you a letter. In that letter, the lender will state the terms you will need to meet to get back the car.
Redeeming a Repossessed Car
If you have the money, you can pay off the loan's total amount, and the car will become yours. When borrowers take this path, they are "redeeming" their vehicle. It’s similar to a redemption in bankruptcy, but requires you to pay more than just the value of the vehicle.
Not only will you need to pay off the remaining balance of the loan, but depending on state law, you’re likely also responsible for repossession costs, including:
Other repo fees
Of course, most people who are struggling to make their car payments will not have a pile of money sitting around. Paying off the full amount owed may not be possible. If you’re in this situation, don’t fret, you have other options.
Reinstating a Loan
The second method is to pay all of the outstanding loan payments. By making up for the missed payments, you "reinstate" the loan. If you reinstate the loan, you’ll still have to pay all repossession fees. Once the lender returns the car, you will go back to making payments based on the terms included in your contract with the lender.
Buying the Car at Auction
The third method is to buy the car back from the lender when they sell it at auction.
You would need to bid for the vehicle, and other people could also bid for the car. If you buy the car back at auction, you’ll still need to pay the "deficiency balance." The deficiency balance is the difference between the amount you pay at the auction and the amount you owed on your outstanding loan balance.
If the lender took your car in error, you can challenge the repossession. Your state might also have laws related to how the lender can repossess your car. Sometimes a repo company may violate your rights by threatening you, attacking you, or breaking into a locked garage. When this happens, you might want to consider speaking to a lawyer about taking legal action.
Reaffirmation Agreements and Car loans
If you filed for bankruptcy and the lender for your car was planning to repossess your vehicle before you filed, you may be able to keep the car through a bankruptcy redemption or if the lender agrees to a reaffirmation agreement. A reaffirmation agreement involves agreeing to make payments on the car regardless of your bankruptcy discharge. Lenders may not offer such an option in all cases.
In a Chapter 7 bankruptcy, you can stop paying your car loan, but the loan company will take that vehicle in exchange because the car loan is a secured debt. If you haven’t yet filed for bankruptcy, taking that step might offer ways to get your repossessed car back. Reaffirming the loan means that you are telling the company that you will make payments on the car instead of getting rid of the debt. These agreements can offer benefits, such as:
You may be able to get better terms, like a lower interest rate
The reaffirmation may help improve your credit
You get to keep the car as long as you honor the new agreement
Lenders know that they often lose money when they repossess a car and sell it at an auction. They are often willing to agree to new terms because it will help them limit their losses.
You’ll have to remember that you can’t discharge the reaffirmed debt. If you owed $6,000 on a car worth $5,000 at auction, you could avoid paying the full $6,000 in bankruptcy. But, if you reaffirm the loan, you’re responsible for the total $6,000. If the company later repossesses the car because you default, you’ll still owe the difference.
In some cases, if the amount you owe on the car is far more than the vehicle is worth, it might be less costly to purchase a different car. So, if the fees related to the vehicle repossession and the remaining loan balance are high, you might not even want to try to get the car back.
Why Repossession Hurts Your Credit
There are three nationwide credit bureaus that keep track of credit information. Those agencies are Experian, Transunion, and Equifax. Each will give you a credit score ranging from 300 to 850. Lenders favor borrowers who have higher credit scores because the scores indicate that a person is likely to repay their bills and loans.
If you don’t pay your personal loans, credit card debt, or parking tickets, among other things, your credit score will go down. A lender will then suspect that you might not pay them back for the loan money you borrow.
Every time you make a payment, pay late or miss a payment, the event becomes a part of your credit report. If a lender repossesses your car because you didn’t make the payments, that will impact your credit score and cause the number to drop. The impact of that repossession will depend on many factors that are already on your credit report. Whether the bank ended up repossessing the vehicle or you completed a “voluntary repossession” by turning the car in yourself won’t make much of a difference.
If the lender sells your car at auction, they may send the loan's remaining balance to a debt collection agency. That remaining debt will also impact your score. If a court enters a judgment against you stating that you owe the amount, this will also impact your score.
If you want to purchase a new car, bad credit might mean that the new loan will have worse interest rates. These rates can mean that you will pay more each month than a borrower who has a good credit score and can obtain better interest rates.
If you have questions about your credit score, consider looking up your credit report. You can get more information about how to get a free copy of your credit report here in Upsolve’s Learning Center. Checking your credit is the first step in working to repair that score.
Fixing Your Credit After Car Repossession
You can start to fix your credit after car repossession with some simple steps. First, remember to check your credit report. If you find any mistakes in the report, you can dispute them. Never let someone else's errors negatively impact your credit.
One of the most crucial ways to fix your credit is to try to pay your bills on time all of the time. If you can only afford to pay the minimum balance, then pay the minimum balance, but do so consistently.
If you can’t obtain a credit card or other loan, speak to friends and family to find someone willing to cosign with you. A cosigner will take on the responsibility of the debt if you do not pay. The added cosigner will give the lender confidence when loaning to a borrower with a poor credit history and will allow you to prove yourself.
Look at your credit card balances and the spending limits. Try to avoid exceeding a balance above 30% of your spending limit, and make the payments on time each month.
The more time that passes, the less critical the repossession will be for your overall credit score. You will benefit from taking a forward-looking mindset. Start tackling your credit score with careful borrowing practices.
Buying A Car After Repossession
You can buy a car after repossession, but you’ll need to be careful about the steps that you take to obtain that vehicle. Your best bet is to buy an inexpensive used car without taking out a loan. Of course, not everyone can afford a car without financing.
Taking out a loan after repossession often means you don’t qualify for the best loan rates. You’ll have a higher interest rate than someone with good credit. When shopping for a vehicle at a dealership, look at the loan documents. Make sure that you understand the fees and costs to avoid getting taken advantage of or surprised by an unethical lender.
Finding a cosigner can help. The cosigner will guarantee the loan and might be able to convince a lender to offer a better deal. Remember that the cosigner will have to make payments if you default. Even if you file for bankruptcy, your cosigner will be responsible for the loan.
Also, be realistic about the monthly payments. Repairing your credit score will mean that you must make your payments on time. Committing to a high car payment can put you at risk of falling behind again, so be careful about the loans that you take out. Within a few years, that repossession will matter much less, and you’ll be in a better position to negotiate favorable car loan terms.
Repossession might feel like an overwhelming strike against you and your finances. It’s important to realize that you can repair bad credit. Working to reach a healthy financial situation after a repossession will mean that this experience will move into the past.
Tackling your financial situation will involve facing the issues that led to the repossession in the first place. Consider taking a hard look at your credit report. If you need a car, you still have options for getting a vehicle. You will just need to be realistic about your options so that your credit will start to heal.