How Does Repossession Work?

If you take out a loan and don’t pay it back according to the terms, the lender may be able to repossess property you put up as collateral to the loan. Taking the property back gives the lender a chance to recoup some of their losses. Not all loans allow for repossession. There needs to be collateral to repossess and the terms of the loan have to give the lender this right. Repossession has several downsides. You not only lose your property to a creditor, but you’ll also damage your credit score.

What Is Repossession? 

Repossession happens when a lender seizes property after a borrower defaults on a debt or violates the terms of a loan. There are different types of loans, and not all loans allow for repossession. Secured debt does. This is debt that’s backed up by collateral in case of default. Collateral is property that secures a debt in case a borrower can’t pay it back. The creditor’s legal right to repossess collateral is called a security interest. Car loans are a common type of secured debt. If a borrower defaults on a car loan, the lender can take the car back through repossession.

Another defining characteristic of repossession is that it gives the lender the right to self-help. This means a lender can take back the property serving as collateral without a court order or other form of government permission. 

Foreclosure is like having your home repossessed, but there are also some differences. In a judicial foreclosure, the lender must first get a court order to foreclose on a home. But in a non-judicial foreclosure, no court order is necessary. The lender still has to follow rules that are more involved than a creditor trying to repossess a car.

What Items Can Be Repossessed?

Almost any property of value can serve as collateral in a secured loan. The key point is that the purchase must be made with a loan secured by property. If a purchase is made with unsecured debt (like a credit card), the lender can’t repossess the items the borrower purchased. Items that commonly serve as collateral subject to repossession include:

• Real property, like your home and the land it sits on

• Artwork

• Cars

• Boats

• RVs

• Jewelry

When Can a Lender Repossess Your Car? 

Auto repossessions are a common type of repossession. These often happen when the borrower is in default on the car loan or violates the terms of the loan. 

Being in default can mean different things. It’s based on the terms of the loan and outlined in the loan contract. Usually, it means the borrower has missed payments, made late payments, or made only partial payments. Some loans give borrowers a 10 or 15 day grace period after the payment due date to make the payment without penalty. If the borrower hasn’t made a payment by the end of the grace period, the borrower will be in default.

Defaulting on your loan payments isn’t the only way to have your car repossessed. If you’re current with your loan payments, you can still face repossession if you don’t follow all the conditions of the car loan agreement. For example, you must maintain proper car insurance on your vehicle. Most lenders require more than the state minimum coverage. They’ll want you to add comprehensive and collision coverage as well. If you don’t have adequate car insurance, you risk repossession.

How Car Repossession Works 

Car repossession laws differ by state. But in most states, a lender or creditor may repossess a borrower’s vehicle without a court order or without giving the borrower any prior notice. But that doesn’t mean the repo man can do whatever he wants. For example, the repo man can’t breach the peace to repossess your car.

Breaching the peace means something different in each state, but it typically refers to actions or behavior that create a public disturbance. Some examples of potential breaches of the peace are:

• Trespassing onto private property, including opening an unlocked door, window, or garage door to gain access to the property

• Using, or threaten to use, physical violence against the borrower

• Damaging the borrower’s property in the course of repossession

After the lender repossesses a car, they can do whatever they want with it, including keeping the vehicle or selling it. If the lender decides to sell the car, but the proceeds from the sale don’t cover the balance of the car loan, the borrower could be liable to pay the deficiency balance. A deficiency balance is the difference between the repossessed car’s selling price and the remaining balance on the car loan. 

If the repo man breaches the peace when repossessing your car or the lender doesn’t follow all the rules for repossession, you could have a claim for damages against them. Alternatively, you could use these violations as a defense if the lender sues you to recover the deficiency balance.

If you’d like to learn more about how the repossession process works or how to defend yourself in a legal action relating to repossession, it’s a good idea to get professional advice. A car repossession attorney in your state is ideal, but if you can’t afford one, there are ways to get free legal assistance.

How Repossession Affects Your Credit 

If a lender repossesses your car or other property, it’ll show up on your credit report and harm your credit score. The repossession can stay on your credit report for up to seven years and lower your credit score by as much as 100 points. This will make it more difficult to get approved for new loans in the future. Lenders will see you as a risky borrower since you didn’t pay back a previous loan. That said, if you have healthy money practices after the repossession, you can decrease the effect of the repossession on your credit over time. 

What Is Voluntary Repossession? 

If you’re having trouble making your car payment and you want to avoid a repossession, you can do a voluntary repossession. In a voluntary repossession, you contact your lender and make arrangements to give your vehicle back so they don’t have to hire someone to repossess it. While losing your car is frustrating, voluntary repossession has several advantages over involuntary repossession. For one, you won’t have to pay repossession fees. Also, you won’t have to face the uncertainty of a traditional repossession. Not knowing when or where repossession might take place can be stressful.

Despite these two advantages, the effects of voluntary repossession are similar to a traditional repossession. If there’s a deficiency balance, you’ll still owe that money, and there’ll still be a negative impact on your credit history. In some cases, voluntary repossession has less of a negative effect on your credit score.

How To Avoid Repossession

The best way to avoid repossession is to use good money habits. Budget wisely to make sure you can afford your car payment and all the other costs of car ownership. By the time you’re delinquent on a car loan, it’s difficult to avoid repossession. So as soon as you encounter financial difficulty or can foresee an upcoming financial challenge, contact your lender. They don’t want you to default on your car loan any more than you do. So they’re often willing to work with you. Ask them if they have car payment hardship programs you can use to avoid repossession.

They may allow you to adjust your due date. If you need an extra few weeks to avoid missing a car payment, a lender may be willing to change your payment deadline. Just remember that you’ll probably have to pay the extra interest that accrues during this extension.

You may also be able to get a car loan deferment. This is where your lender agrees to let you stop making payments for a few months (or only asks you to make partial payments). After the deferral period ends, you resume making car payments like normal. Interest will still accrue during this deferral period. And the few months you didn’t make payments are tacked on to the back of your car loan, extending its term. 

It may also be possible to refinance your auto loan. With a refinance, you can lower your monthly car payments with the help of a lower interest rate, extended car loan term, or both.

One thing to keep in mind is that with the arrival of the coronavirus pandemic, many lenders are more willing to work with borrowers to help them avoid repossession.

Let's Summarize...

Repossession happens when a lender recovers property acting as collateral for a secured loan. Almost any type of property can be repossessed, although vehicles tend to be the most common. When a lender repossesses a vehicle, it’s usually because the borrower has defaulted on the auto loan. But lenders may repossess a vehicle for other reasons, such as the borrower not having proper car insurance coverage.

Repossession has serious negative consequences. In addition to losing your property, you’ll see your credit score drop. It will be more difficult to get new credit until the repossession drops off your credit report in seven years. If you hit a financial rough patch and anticipate having difficulty paying your car loan, contact your lender. There are often options to help you avoid having your car and other property repossessed.