The effects of the coronavirus pandemic have been especially burdensome on auto loans borrowers. Unlike student loans and mortgages, there are no government-backed relief programs to cover a monthly auto payment.
The result is most devastating for subprime borrowers — those with credit scores under 600. Serious delinquency levels within that group rose about 22% between the fourth quarters of 2019 and 2020.
If you miss even one payment, and your lender technically can repossess your wheels.
So what can you do if you know you’re in danger of having your car repossessed — or if it’s already been repossessed? Check out this guide to help you before, during and after car repossession to help you and your finances survive this bumpy ride.
Car Repossession: What Can You Do Before, During and After?
How can your bank, credit union or leasing company possibly have the right to take back your vehicle? Read your loan agreement.
An auto loan contract states if you fail to make a payment — and the process can legally start after one missed payment — the lender has the right to take back your car.
But will a lender really take your car if you’re late on this month’s payment? It’s unlikely, according to Bruce McClary, vice president of communications for the National Foundation for Credit Counseling in Washington, D.C.
State rules vary on how a lender can repossess a vehicle, and some have placed limits on repossessions in response to COVID-19. Find your state’s rules on the National Consumer Law Center website.
“The efforts to repossess your car typically start after you’ve missed a couple of consecutive payments,” he said. “If you miss two payments, you should start getting a little bit concerned, and if you miss three payments and your car is still sitting in your driveway, you may not have much more time.”
Depending on where you are in the car repossession process, you do have options for keeping your car — and more of your money.
What to Do if You Can’t Make Your Auto Loan Payments
The first rule of preventing a vehicle repossession: Communicate early and often.
Although lenders may have the legal right to start the repossession process the day after a missed payment, most give customers a grace period of at least 10 days when they won’t even charge a late fee. If you’re in this situation, the time to act is now.
Facing bankruptcy? You may be able to hold onto your car. Consult your bankruptcy attorney about whether your filing status allows you to retain property, including your vehicle.
If you have the cash, paying off what you owe to make your loan current again may be the ideal solution, but there are other options if you’re struggling to make payments:
- Ask about forbearance programs. Call your lender to explain why you’re unable to make your monthly payment and request a forbearance. Be prepared to share details and documentation if it’s due to a job loss, illness or change in family status. Your lender may offer a delay in your payment or a revised schedule of payments, but you’ll still be responsible for the loan — and oftentimes the accruing interest. But if the situation is temporary, a forbearance could let you delay payments until you’re back on your financial feet.
- Downsize to a cheaper car. If you can trade in your current set of wheels for a more economical version — think smaller and older — you could roll your old loan into a new, more manageable one. Be sure to get a pre-approved auto loan to give yourself some leverage when negotiating the interest rate.
- Sell your car. If you don’t need the vehicle, you could potentially sell it for enough money to pay off the loan balance, which would free you from monthly payments entirely.
- Refinance. This option may be the most difficult to successfully pursue for many borrowers, as lenders have tightened their standards due to the current economic situation. But if you have an excellent credit history and you have stable employment, you could qualify for refinancing your loan at a lower interest rate, thus reducing your monthly payment.
It’s to your lender’s financial benefit to work with you rather than spending the money to repossess your car, but they can’t help unless they know what you’re facing and what you’re able to pay, according to McClary.
“Communication is one of the best tools that you have in the earliest stages when you’re late making car payments,” he said. “The fewer unanswered questions that your lender has, the more likely they are to try to cooperate.”
What to Do if Your Car Is in Danger of Being Repossessed
Because the repossession process is outlined in your loan agreement, your lender legally can repossess your car without notice or a court order. But most lenders will call, email or send notices (or all of the above) outlining the consequences if you begin missing car payments.
If you’ve missed even one payment, here’s why now is the time to dig up the loan agreement you signed when you originally bought or leased the car:
- Your loan agreement should state how many payments you can miss before the lender can repossess your car.
- If you haven’t been paying your auto loan, there’s a good chance you haven’t been paying your auto insurance either, and some lenders require insurance as a condition of your loan. Even if you haven’t missed enough payments to have your car repossessed, the lender could potentially take your vehicle due to inadequate auto insurance.
Find your contract and contact your lender’s loss mitigation or collections department to explain your situation, advised Jenelle Davis, who worked in the credit union industry for seven years.
“Act very quickly,” she said. “Because at that point, the loan has not been sent out to collections.”
By contacting your lender early in the process, you’ll not only create a record of your attempts to satisfy the loan, you’ll avoid additional fees that the lender may incur by hiring a third party to collect your vehicle.
The repo company cannot “breach the peace” — aka break the law. If the collector uses physical force or destroys your property, you can potentially file a lawsuit. Keep notes of all interactions.
If you don’t have enough money to cover the missing payments, you should explain your situation and offer at least a partial amount — in cash — as a show of good faith, according to Davis.
“There’s no shame in saying… ‘I have a couple hundred bucks in my budget, can I throw this on the loan so that I don’t get it repoed?’” she said.
If you can’t reach a deal with your lender, you should prepare to have the car repossessed by removing all personal items from your car, as repo companies can take your car at any time — whether the car is parked in front of your home, at work or at the grocery store.
And if you think hiding the car will keep the repo company at bay, you’re likely only adding to the fees you’ll end up having to pay as the company expends resources — including paying someone to follow you — to locate the vehicle.
If you know that you’re already in danger of having the car repossessed, there is a way to mitigate the financial impact: voluntary repossession.
That’s where you drive the car to your lending institution and hand over the keys. Doing so voluntarily still counts as a type of repossession, but you’ll avoid towing costs and other expenses the repossession company charges to locate your car.
Avoid a Friday evening car repossession if possible: Repo companies are often closed over the weekend, but they’ll charge you storage fees for Saturday and Sunday.
And although a voluntary repossession will affect your credit score, your lender will technically report it to the credit reporting agencies as a “voluntary surrender” rather than an involuntary “repossession” — which could help as you recover.
“The difference between the two in terms of impact on your credit score is slight,” McClary said. “But if you’re thinking about trying to restore your good credit and how much effort it’s going to take, every little bit helps.”
What to Do if Your Car Has Been Repossessed
Your car has been repossessed. Now how do you get it back?
After taking possession of your car, the lender begins the process for recouping the money you still owe on the car loan, plus any fees incurred — think towing, storage of the vehicle, re-keying the car and legal fees.
The best way for the lender to get that money is to sell the car, often through an auction. So you’ll have to act fast if you want your car back.
You have a few options — some are less costly than others, but none are particularly easy:
- Reinstate your loan. — Pay the past-due amount, plus any late fees and repossession costs. You get your car back and resume paying your car loan.
- Redeem your loan. — If you had enough money to pay off your loan in the first place, you probably should have done this before the repo company took your car. But if you pay off the loan and all fees, you get your car back free and clear of any loans.
- Give up your car, then buy it back. — The lender will sell the car, typically at auction, to get some of its money back. It’s technically possible for you to buy back your car by bidding on it at auction, but you’ll still be responsible for paying your old loan, plus all those fees.
If you’re unable to come up with the money to get your car back, the lender will use the proceeds from the sale to pay off what you owe. If the sale price is less than your loan balance plus any fees, the difference is called the deficiency balance. That’s the amount you’ll be responsible for paying.
Don’t destroy your car to get revenge. Your lender may not take the vehicle if it’s deemed worthless, but then they can’t sell the car to pay off your loan. You’ll end up owing more.
If the deficiency balance is small enough, McClary recommended trying to negotiate with the lender to settle the remaining balance so you aren’t still paying for a car you no longer own.
If the amount is too large to settle, though, the lender will contact you and, depending on the state where you live, can pursue the deficiency balance through collections.
“They could take you to court over the money you owe, and try to garnish your wages,” he said. “There are all kinds of ways that they could legally pursue repayment of that debt, beyond the sale of the vehicle.”
The Long-term Effects of Car Repossession
Although losing your vehicle and the repossession expenses may be upsetting or even devastating, the lasting financial consequences of a repossession could hurt even more.
Your credit score will take a hit — a big one.
“I would put it on that scale of somewhere around bankruptcy or foreclosure,” McClary said. “You can climb out of this hole, but it will take some time.”
Car repossession can remain on your credit report for seven years — making it more difficult to qualify for another loan, increasing the interest rate you’re charged on other loans and even potentially affecting your ability to get a job or a place to live.
But a car repossession isn’t the end of the world, so long as you commit to making smart money-management moves that raise your credit score and help get yourself back on the road to recovery.
Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.
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