If you’ve fallen behind on your car payments and are worried about your vehicle getting repossessed, you might be wondering what your options are.
Team Clark has heard from plenty of people over the years who can’t make the payments on their vehicles for various reasons including unfavorable loan terms or changes in their financial situations.
In this article, we’ll cover how car repossession works and what you should do — and shouldn’t do — if you’re worried about your vehicle being repossessed.
How Does Car Repossession Work?
If you've missed only a payment or two, you're probably not in imminent danger of repossession. If that's the situation you're in, stop what you're doing and call your lender right now.
In many states, your creditor has the right to take your car away if you miss even one payment, according to the Federal Trade Commission (FTC). But money expert Clark Howard says that rarely happens.
"The most important thing if you know you're going to miss a payment is to get in touch and stay in touch with the lender and tell them the truth," Clark says.
The lender may be willing to work with you — we’ll discuss that further below.
If you have missed multiple payments on your auto loan, though, the law generally allows your lender to take back the vehicle from you — often with little or no warning. They can also come onto your property to do that.
Once your car has been repossessed, the lender may choose to resell the car to try to recoup some of the money that you owe. If that’s the case, you’ll still owe what’s called the “deficiency.” That’s the difference between what you owe on the vehicle and what they were able to get by selling your car.
“For example, if you owe $10,000 on the car and your creditor sells it for $7,500, the deficiency is $2,500 plus any other fees you owe under the contract,” the FTC says on its website. “Those might include fees related to the repossession and early termination of your lease or early payoff of your financing.”
Beyond owing the lender that money, repossession can have other serious negative impacts on your financial life.
How Can Car Repossession Affect Your Credit?
Having your vehicle repossessed doesn’t let you off the hook for the money you still owe on it. But in addition to that, you should be aware that there are other consequences of repossession that could haunt you well into the future.
The first is that any late or missed payments on your auto loan can go on your credit report and stay there for seven years.
Second, the repossession itself could be noted on your credit report and stay there for seven years after your first missed payment, according to credit reporting bureau Experian.
In addition, the money you still owe if you can't make up the deficiency could go to collections, which can also stay on your credit report for seven years.
Finally, there could be court judgments against you in the event that you are unable to pay. If that’s the case, you may find yourself in need of legal representation.
"Depending on what you have signed and what the facts of your case are, you need to see a lawyer," says Atlanta attorney and former Fulton County (Georgia) magistrate court judge Quinton Washington. "The entity that repossessed the car will likely have one."
What You Can Do if You’re Worried About Repossession
So what can you do if you’re struggling with payments and want to try to avoid repossession? Here are a few options.
Communicate With Your Lender
This is by far the best approach to staving off repossession. The key is to be proactive. This is true even if you haven’t missed a payment yet, but are worried you might be in danger of doing so. You may be able to work out a deal, but communication with the lender is key.
"The big thing not to do is hide from this," Clark says. "Because if you just don't tell them anything and you're not making your payments, they just proceed on a regular track of doing a repossession of your vehicle."
Remember, this isn’t a negotiation since the lender holds all the chips. It’s really just about being honest about your situation and seeing if the lender willing to work with you on a plan.
Try to Refinance Your Auto Loan
Another thing you can try to do is to refinance your auto loan to make the payments more manageable.
This may not be possible if you have a low credit score or already have negative marks for missed payments on your credit report, but it could be worth a shot if you made the mistake of getting a loan with bad terms to begin with.
"Most people's car loans are at rates that are way too high, especially for people who have good credit scores," Clark says.
Sell the Car
Finally, you can try to avoid some of the headaches associated with repossession by selling the vehicle and paying off the loan balance before your car is repossessed. Keep in mind that you will still owe the difference between the payoff amount on your loan and what you are able to get for the vehicle in a sale.
It's also possible to buy the car yourself after repossession and then sell it, according to Washington.
“If your car gets repossessed, watch for the notice of sale from the creditor. It traditionally will come as certified mail and within 10 days of repossession,” he says.
At that point, you can let the creditor know that you want to buy the vehicle.
“The car can be purchased before it is sold at auction, but you must notify the seller immediately — before the car is sold — by certified letter,” Washington says.
What NOT to Do if You’re Worried About Repossession
If you're facing repossession, we've laid out some options above. But you might be getting some other advice. Here's what you shouldn't do if you're worried about your car being taken from you.
Trade In a Car You Owe Money On
You might be tempted to trade in a vehicle you can’t afford for a different one. This could work, but you should be aware of the potential pitfalls.
The first is that there’s no guarantee the dealer will make you square.
“You’re trusting that the dealer you’re trading the vehicle in to is going to pay off the loan on that trade-in,” Clark says.
However, the dealer has no legal obligation to do that.
“You signed the note originally for the vehicle you traded in,” Clark says.
The second danger is in rolling the amount you owe on the current vehicle into the note for the new one. That leaves you in essentially the same position you’re were already in — or worse.
“What happens is such an unbelievable disaster that it may take you years and years to recover,” Clark says.
Do a ‘Voluntarily Repossession’
You might have been told you can be proactive about the situation and relinquish the vehicle to avoid the repercussions of repossession. Clark says this simply isn’t true.
"People also have this mistaken impression that they can do a voluntary repossession and that will be better for their credit than if it's an involuntary repossession," he says. "It makes no difference. You still have a repo. And having a repo is no good under any circumstances."
Try to Hide the Car
Finally, some people think that if they just hide their vehicle they can avoid repossession. This is just a bad idea all the way around.
“People do the most amazing things,” Clark says. “They’ll paint the car, they’ll change the tag on the car, they won’t park it at their own house or workplace. They’ll do all kinds of things to hide it from the lender. I don’t recommend any of those devious things.”
In fact, doing any of these things can only double your trouble from a legal standpoint.
“If you keep riding around in a car you have not been paying for as agreed, the owner can take out a felony warrant against you for theft by conversion,” Washington says. “It means you are depriving the rightful owner of use of the vehicle. The punishment can be more than a year in prison.”
More Content From Clark.com:
- How to Sell Your Car in 5 Steps
- Should You Refinance Your Auto Loan?
- What Do I Do if I Can't Afford My Car Payment?