How Does Repossession Work?

What Is Repossession?

Repossession occurs when a lender or leasing company seizes your vehicle for nonpayment. When you take out a car loan, the vehicle you buy acts as collateral to secure the loan—meaning the lender technically owns the car until you pay off the debt. With a lease, you're essentially renting the vehicle for a period of two to four years.

Lenders and leasing companies are generally allowed to repossess your vehicle as soon as you miss a payment, but it typically happens once you're 90 days past due on your loan—your loan or lease agreement should explain at what point you'll be in default.

The lender or leasing company will then sell the vehicle at auction to try and recoup the remaining loan balance or the value of the vehicle.

How Does Car Repossession Work?

The repossession process can vary depending on your lender or leasing company. Additionally, each state has different laws regulating repossession, so there's no universal experience.

That said, there are some general things to know about how repossession works, so you can have an idea of what to expect.

Types of Repossession

Repossession is generally involuntary, meaning that the borrower doesn't have a choice in the matter. However, if you find yourself behind on payments, you can opt for voluntary repossession, where you turn in the car to the lender or leasing company on your own accord.

Voluntary repossession, also called voluntary surrender, can help you avoid some of the costs related to involuntary repossession, and it can also make you look better to future lenders because it indicates that you took responsibility for the situation and were willing to work with your lender or leasing company.

Your Vehicle Is Seized

There's no legal requirement for a lender to notify you before seizing your vehicle. Additionally, some states allow lenders to install a "kill switch" in the vehicle, preventing you from starting it and making the repossession process easier.

That said, they're not allowed to "breach the peace." For example, they can't use physical force, threaten to use force or remove the vehicle from a closed garage without your permission. In some states, kill switches are also prohibited.

Repossession can come with a variety of fees that you'll need to pay, such as storage, sale preparation, attorney fees, prepayment penalties and early termination of the lease.

The Lender Sells the Vehicle

Once the lender or leasing company has possession of the vehicle, it may choose to keep the vehicle or sell it privately or at a public auction. In some states, the lender is required to tell you where the auction will be held, allowing you to bid on it. You may also be able to buy back the vehicle in a private sale or reinstate your loan.

You Pay the Deficiency Balance (When Applicable)

If the lender or leasing company doesn't get enough from the sale to cover what you owe, including repossession-related costs, you'll have a deficiency balance. If you can't pay the amount, some states allow the lender to sue you to collect the debt.

In contrast, if the proceeds from the sale exceed your remaining loan balance or the value of the leased vehicle plus repossession-related costs, some states require the lender or leasing company to disburse the surplus amount to you.

How Long Does Repossession Stay on Your Credit?

Repossessions remain on your credit reports for seven years from the date you stopped paying your loan. Because your payment history is the most important factor in your FICO^® Score^☉ , late payments, default and repossession can damage your credit score significantly, even if you ultimately surrender the car voluntarily.

If the lender sends the deficiency balance to collections, the collection account will also show up on your credit reports, wreaking further havoc on your credit profile.

As a result, repossession can make it difficult to get approved for credit in the future. Like other derogatory marks, however, the impact of a repossession can diminish over time, especially if you develop good credit habits and establish a positive credit history going forward.

How to Avoid Repossession

The best course of action is to make all your payments in full and on time to avoid possible repossession. But if you're in danger of missing even one payment, here are some steps you can take to avoid losing your vehicle:

• Be upfront with your lender. While you may be worried about letting your lender know you're struggling, it's in both of your interests to work together. The repossession process can be costly, and with no guarantee that it'll recoup all of its costs, your lender will likely be willing to help you find a solution while you get back on your feet financially.
• Request forbearance or loan modification. Depending on the options your lender provides, you may be able to get a short-term forbearance on monthly payments or a long-term modification to your monthly payments.
• Get caught up as quickly as possible. If you've already missed a payment or two, make it a priority to get current on the loan as quickly as possible. You may consider asking loved ones to help or seeking financial assistance for other areas of your budget to free up some cash for your obligation.
• Sell the vehicle. If you can afford a lower monthly payment, consider selling the vehicle or returning the lease early and getting a less expensive vehicle instead. Just keep in mind that there may be costs related to early payment of a loan or early termination of a lease.
• Refinance your loan. If your credit is still in good shape, you may be able to refinance the auto loan. Depending on the situation, you may qualify for a lower interest rate, which can help reduce your monthly payment. You may also be able to extend your repayment term, resulting in a lower monthly payment—albeit with more total interest charges over the life of the new loan.
• Consider a voluntary surrender. If you're notified in advance of a repossession and can't find a way to cover your outstanding balance, consider voluntarily turning the car over to your lender. Voluntarily surrendering your car could help you avoid the stress and costs of repossession, as well as some of the negative repercussions for your credit.

What to Do if Your Car Is Repossessed

If your lender has decided to seize your vehicle, here are some steps you can consider to get the car back or to pay what you may owe:

• Know your state's laws. Most state laws also require lenders to follow specific processes, such as notifying you after the repossession and alerting you when they plan to sell the vehicle. It's helpful to know your state's laws to make sure your lender is following all the correct legal steps. To find more information about repossession laws in your state, check with your state's attorney general's office.
• Retrieve your personal possessions. If your lender or leasing company seized your vehicle without notifying you first, ask about how to retrieve your personal belongings—they aren't allowed to keep or sell your personal property.
• Try to reinstate the loan. You may be able to reinstate your loan or lease by paying off your past-due payments and the repossession expenses incurred by the lender or leasing company.
• Consider buying back the car. Depending on where you live, you may be able to buy back the vehicle if you can afford it. Some states require lenders and leasing companies to notify you about public auctions or allow you to buy it in a private sale by paying off the debt and repossession-related costs.
• Reevaluate your financial situation. Depending on the events that led to the repossession, take stock of your financial situation and determine whether you can make changes to your budget or if you might need credit counseling.
• Take steps to improve your credit. Your credit score has likely taken a big hit in recent months. Check your credit score and credit report to get an idea of where you stand and determine other potential areas that need some work. Then, take concrete steps to rebuild your credit and establish positive credit habits.

The Bottom Line

Vehicle repossession can have a drastic impact on your credit score and finances, so it's important to try to avoid it at all costs. If you're at risk of falling behind on payments—or you've already missed one or two—consider steps to avoid repossession, if possible.

If your lender or leasing company has already seized your vehicle, think about the different paths you can take to reinstate your loan or lease, buy back the vehicle or move on and improve your credit.

Throughout the process, monitor your credit score to understand how your actions impact your score and track your progress as you take steps to improve it.