What Is Car Repossession?

Updated: May 20, 2024

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Car repossession, also referred to as “car repo,” is when a lender reclaims a vehicle following a borrower's failure to make timely payments. The lender usually initiates repossession when the borrower has missed three or more consecutive payments.

Repossession can have negative impacts on your credit score and future financing options and should be avoided at all costs. If you’re facing vehicle repossession, MoneyGeek can help you understand your rights, the steps involved, its financial impact and how to recover.

Types of Car Repossession

Car repossession can either be voluntary, where the borrower willingly returns the car, or involuntary, where the lender forcibly takes it. Each one has unique consequences for the borrower's credit and finances.

  • Voluntary Repossession: This occurs when you, the borrower, realize that you can no longer afford to make payments on your vehicle and voluntarily return it to the lender. Voluntary repossession might still impact your credit score, but not as severely as involuntary repossession. This is because it shows on your credit report that you took responsibility for repaying your debt to the best of your ability. You might save money in terms of repossession costs, such as towing charges, if you're returning the vehicle yourself.

  • Involuntary Repossession: This is what typically comes to mind when people think of car repossession. If you default on your car loan (typically after around three missed payments), the lender has the right to take back possession of the vehicle without your consent. This often involves hiring a repossession company to locate and seize the vehicle. This type of repossession can have a more severe impact on your credit score than voluntary repossession.

Steps of Car Repossession

The steps below illustrate how car repossession works, from the set of missed payments through to the final sale, and will help you understand what happens to a repossessed vehicle.

1
Missed Payments

The borrower fails to make their scheduled car loan payments. Typically, once a borrower has missed around three payments (or is approximately 90 days past due), the risk of repossession significantly increases.

2
Lender Contacts Borrower

The lender usually attempts to contact the borrower to discuss the missed payments, potentially offering alternatives or solutions to avoid repossession.

3
Lender Initiates Repossession

If the borrower is unable to make up the missed payments or arrange an alternative solution with the lender, the lender can initiate the repossession process. This is where the lender generally hires a repossession company to physically retrieve the vehicle. This can be done without any prior notice to the borrower.

4
Location and Seizure of Vehicle

The repossession company locates and seizes the vehicle. They can take the car from any public location, including your driveway, the street, a parking lot or even your workplace. The repossessed vehicle will then be taken into storage.

5
Notification and Opportunity to Redeem

The lender must send the borrower a post-repossession notice detailing the rights of the borrower, such as the right to redeem the vehicle (by paying the total debt outstanding plus any applicable fees) and the planned disposal of the vehicle.

6
Sale of the Vehicle

If the borrower does not redeem the vehicle within the specified period, the lender typically sells the vehicle, often at an auction, to recover the outstanding debt.

7
Deficiency Balance

If the sale does not cover the full amount of the loan, plus any applicable fees and costs, the borrower may still be responsible for paying the remaining amount, known as the deficiency balance.

Financial Impact of Car Repossession

Car repossession can severely damage a good credit score and lead to additional financial burdens like deficiency balances and higher interest rates. It can also make securing future auto loans more challenging.

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    Damage to Credit Score

    Repossession will typically tank your credit score and remain on your credit report for seven years.

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    Additional Charges

    The borrower may be responsible for repossession costs, which can include towing fees, storage fees and any costs associated with the sale of the vehicle, such as auction fees.

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    Deficiency Balance

    This is charged if the sale of the repossessed vehicle doesn't cover the remaining loan balance and any associated costs.

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    Increased Interest Rates

    Future loans or credit may come with higher interest rates due to the perceived risk associated with lending to someone who has previously defaulted.

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    Difficulty Getting Future Auto Loans

    Lenders may be hesitant to approve an auto loan to someone who has had a car repossessed in the past.

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What to Do if Your Car Is Repossessed

Actionable steps you can take post-repossession include contacting your lender, reviewing your contract, retrieving personal belongings and arranging alternative transportation.

1
Contact Your Lender

Reach out to your lender immediately. They may be willing to negotiate a reinstatement or a redemption plan. A reinstatement involves catching up on missed payments plus any fees, while a redemption requires paying off the entire loan balance plus any applicable fees.

2
Review Your Contract

Go over your loan agreement to understand your rights and obligations. Confirm that the lender followed all necessary legal steps during the repossession process.

3
Track Your Personal Belongings

If there were personal belongings in the vehicle at the time of repossession, contact the repossession company or your lender to arrange to retrieve them. Personal items are typically not part of the repossession.

4
Plan for an Alternative Mode of Transportation

While dealing with the repossession, make sure you have a contingency plan for commuting. Whether it's using public transportation, carpooling or renting a vehicle, ensuring you can still get to work or school is crucial.

Consumer Rights in Car Repossession

Know Your Rights

Right to Redeem the Vehicle. Borrowers have the opportunity to get their repossessed vehicle back by paying the overdue amount, plus any associated fees, usually within a specific timeframe.

Right to Peaceful Process. During repossession, agents cannot use physical force against the borrower, intimidate them or enter their private property without permission, ensuring a peaceful process.

Right to Retrieve Personal Property. If borrowers leave belongings inside a repossessed car, they retain the right to recover these items without incurring additional fees.

Source: Federal Trade Commission

How to Recover from Car Repossession

Having a car repossessed is certainly a setback, but there are several ways to recover financially. Here are actionable steps to help you bounce back:

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    Assess Your Financial Situation

    A car repossession is most likely due to a strained budget that leads to missed payments. Carefully scrutinize your spending habits versus your income, identify areas to cut back and make necessary adjustments. Exploring additional income streams, such as part-time roles or freelance gigs, can provide a much-needed boost to your financial cushion.

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    Rebuild Your Credit

    Your credit score will take a hit post-repossession. Make sure you’re paying other bills on time, as this can be a powerful tool in mending a damaged score. Leveraging financial tools like secured credit cards can serve as stepping stones in your credit-rebuilding journey.

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    Communicate With Your Lender

    Open communication lines with your lender are crucial, especially if you're left with a deficiency balance after your car's sale. Engaging in a transparent dialogue can often lead to more manageable repayment structures or even a reduction in owed amounts. Throughout this process, ensure you maintain a clear record of all correspondences for future reference.

Frequently Asked Questions

Uncover key insights into car repossession with these frequently asked questions, from its causes to its effects on credit score and associated costs.

How many car payments can you miss before repossession?
How does car repossession affect my credit score?
What costs am I responsible for if my car is repossessed?

About Nathan Paulus

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Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.

Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.

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