Introduction
Car repossession is a stressful event that can have lasting consequences on your financial health. Beyond the immediate loss of your vehicle, a repossession can significantly damage your credit score, affecting your ability to secure loans or credit in the future. At Automatic Car Credit, we understand the importance of maintaining financial stability and want to help you navigate the challenges associated with repossession.
This guide will explain the effects of car repossession on your credit score, how long the impact lasts, and what steps you can take to rebuild your credit.
What is Car Repossession?
Car repossession occurs when a borrower fails to make payments on an auto loan, and the lender takes back the vehicle as collateral for the loan. There are two types of repossession:
Voluntary Repossession:
The borrower willingly returns the vehicle to the lender when they cannot continue making payments.
Involuntary Repossession:
The lender takes the vehicle without the borrower’s consent, often by sending a repossession company to seize the car.
While voluntary repossession is seen as a more responsible action, both types have similar negative consequences for your credit score.
How Repossession Affects Your Credit Score
- Missed Payments
Repossession typically follows multiple missed payments on your auto loan. Each missed payment is reported to the credit bureaus and can significantly lower your credit score, even before the repossession occurs. Payment history is the most critical factor in determining your credit score, and multiple late or missed payments will have a substantial negative effect.
- Repossession Notation on Credit Report
Once your car is repossessed, the lender will report the repossession to the credit bureaus. This entry will appear on your credit report as a derogatory mark, showing that you defaulted on the loan. Depending on your initial credit score, a repossession could drop your score by 100 to 200 points.
- Deficiency Balance
After repossession, the lender will sell the vehicle, usually at an auction, to recoup the loan balance. If the sale price doesn’t cover the remaining balance, you’ll be responsible for the difference, known as the deficiency balance. Failing to pay this balance could lead to the lender suing you, resulting in additional damage to your credit through judgments or wage garnishments.
- Impact on Credit Utilization
Repossession can also affect your credit utilization ratio, which is the amount of credit you’re using compared to your credit limits. A high deficiency balance will increase your debt load, which may further damage your credit score if it significantly raises your utilization ratio.
How Long Does Repossession Stay on Your Credit Report?
A car repossession stays on your credit report for seven years from the date of the first missed payment that led to the repossession. The good news is that the impact of the repossession will lessen over time, especially if you take steps to improve your credit in the meantime.
Repossession and Future Loan Approval
A repossession makes it more difficult to get approved for new credit, including auto loans, mortgages, or personal loans. Lenders view repossessions as a sign of high risk, and they may either deny your application or offer you a loan with much higher interest rates and less favorable terms.
Steps to Take After a Repossession
- Clear All Outstanding Balances
If possible it is advisable to pay the deficiency balance to the lender. Paying the remaining balance will help you avoid other legal actions and credit repercussions.
- Negotiate a Payment Plan
In case you are unable to come up with the amount to clear the deficiency balance, you can discuss with the lender to be allowed to make payments in installments. This can assist you in not having to go to court and stop the debt from harming your credit for years.
- Monitor Your Credit Report
One should keep checking his or her credit report to verify that all the information concerning the repossession is correct. If you come across any mistakes for instance wrong dates or amounts, challenge the credit bureaus and make the necessary corrections.
- Rebuild Your Credit
- Make On-Time Payments:
Credit history is a very important factor that contributes to your credit score and this aspect makes up 35% of the total credit score. Make sure that all future credit payments are paid on time in a bid to reflect a good credit score.
- Pay Down Other Debts:
Reducing your overall debt will in turn increase your credit utilization ratio and therefore increase your score.
- Consider a Secured Credit Card:
A secured credit card can be useful in rebuilding credit because it enables one to make small purchases and pay them off in full every month, hence improving on the credit payment record.
- Apply for Credit Sparingly:
This is because excess applications for credit are likely to reduce your score. The third tip is to be wise and only apply for credit when it is necessary.
- Debt Management with a Credit Counselor
If you find yourself in a difficult financial situation and are unable to pay your bills on time or at all, then you should seek the services of a credit counselor. It is recommended that you seek the services of these professionals to assist you in a process of how to pay your debts, how to balance your budget and on how to restore your credit status gradually.
Bottom Line
Car repossession is a very bad thing for your credit score but the effects are not for a lifetime. Through paying any remaining balance, repairing the credit and being active with your credit, one can be able to recover from a repossession and even have a better credit score.
At Automatic Car Credit, we’re committed to helping our customers navigate challenging financial circumstances. Contact us today to learn how we can assist you in getting approved for an auto loan, even after a repossession.