Given the dwindling state of the economy, foreclosures and car repossessions are rampant. However, few people understand how car repossession works, or how it affects their credit score. It is important to understand that the repossession of a vehicle has a long standing impact on future auto loans for the borrower.
What is Auto Repossession?
Like any other form of borrowing that involves a collateral asset, the car is mortgaged with the lender for the duration of the loan term. If the borrower cannot meet his debt obligations and defaults on his repayments, the lender reserves the right to repossess the vehicle and sell it to recover the money borrowed by the owner of the vehicle.
The Impact of Defaulting on Debts
Contrary to what most people assume, a car is not just repossessed when the owner defaults on his or her auto loans. If an individual has borrowed money to purchase another asset from the same lending establishment or even a personal loan, the lender may repossess the vehicle for default on any of these loans. Alternatively, the court may also permit a lender to repossess all of the assets of a borrower including any vehicles.
When Can a Lender Legally Repossess a Vehicle?
By law, the lender is required to send three notices over a duration of 30 to 90 days. It varies depending on the state where you live. If the client does not respond to any of these notices, the lender can initiate the vehicle repossession procedures. It is highly recommended that you should reply to any notices you receive from the lender. This can help avoid severe punitive actions such as auto repossession.
How is a Vehicle Repossessed?
If the lender does not receive a response, the financial establishment will simply hire a company with a tow truck to repossess the vehicle from the borrower's residence. Some lenders may send a lending agent to the borrower's home to give the borrower a chance to make payments on the vehicle prior to repossession.
Outstanding Loan Balance
Repossession of the vehicle does not exonerate the borrower from their debt obligations. If the vehicle fetches the entire loan amount on the auction block, the borrower does not have to meet the outstanding loan balance. In most cases, the selling price will be lower than the loan amount, so the borrower will still be responsible for making payments on the unpaid balance of the loan.
Impact of Car Repossession on Credit Scores
Car repossession has a long standing negative impact on the credit rating of an individual. While there isn't any way to determine the exact number of points that will be deducted from the credit score, the borrower's credit rating will be impacted for as long as 7 to 10 years. If there is an outstanding debt after vehicle repossession, this will further damage the credit score, and this issue will be further compounded if there is a legal judgment in the matter.
It is possible to avoid vehicle repossession and the consequent impact on your credit score. There are ways to avoid repossession even for people who cannot meet their debt obligations. Ideally, it is best to get in touch with the lender and explain your situation before the automobile is repossessed.