The repercussions of being late on your car payments might be severe. The possibility of default on your loan gives the lender the power to seize your car.

Nobody wants to receive a visit from the repo man, but this is only one aspect of the issue. The pain and drama of having your automobile impounded is another. Your credit may suffer from an auto repossession in a number of ways. It can also be expensive and disruptive, with consequences that could last for years. What you should know is as follows.

What Exactly Is a Car Repossession?

When you finance an automobile, the lender keeps a security interest in it and keeps ownership of the vehicle until the debt is repaid. Your loan agreement states that if you don't make your agreed-upon monthly payments and go into default, your lender may seize your car. Your loan agreement specifies the precise moment of default, but in practise, most banks and credit unions won't begin the process of taking your property back until at least 60 days have passed after your payment was due.

Repossession regulations vary from state to state. To find out what laws are in force where you are, contact the office of the state attorney general. In many places, lenders must provide you advance notice if they intend to repossess your car. Additionally, a lot of lenders don't let them "breach the peace" when they take your car away; they can't cause any bodily harm or act violently. Any personal items left in the car are also yours to keep.

The lender has the option of keeping or selling your car, but usually chooses to sell it and add the proceeds to the balance of your outstanding loan. You will be responsible for the difference, referred to as a deficiency balance, if the amount your automobile sells for is insufficient to pay off your debt, the price of towing, storage, and any other fees or expenses that have accumulated.

How Does a Repossession Affect Your Credit Score?

For as long as a repossession remains on your credit record, which is typically seven years, starting from the day the loan ceased being paid, it will negatively affect your credit score. But these actions frequently result in the following "dings" on your credit report in addition to the repossession:

Late payments: A bad mark will appear on your report for each month you fail to make a payment.

Defaults: Going into loan default is a bad thing in and of itself.

Collections: Your account may be referred to collections if you are unable to pay off a deficient debt. This will also appear on your credit report and lower your credit score.

Court judgments: When collection efforts fail, a court judgement may be issued.

Due to the complexity of credit scoring, it is hard to estimate the precise number of points your credit score may lose in the event of a repossession. However, the impact will be significant given the numerous hits to your credit and the fact that your payment history makes up the single most important component of your credit score and accounts for 35% of your FICO® Score. Each of the aforementioned items stays on your record for seven years, albeit they lose some of their influence with time.

• How to Prevent Vehicle Foreclosure

  Avoiding repossession is much preferable to dealing with its effects. Talking to your lender is the most crucial action you can take if you're concerned about or already experiencing a repossession. Take a few proactive measures as soon as you notice you're going to struggle to pay your car loan. Investigate the cause of this and potential solutions to your problems:

  Is this a one-time occurrence or a persistent issue?

  Do you have the resources necessary to pay off your loan? Can you timely remit the remaining payments?

  Would skipping a payment or two be beneficial?

  Would refinancing and receiving reduced payments for the remaining balance of your loan be preferable?

  Should you think about cancelling your loan agreement?

  Your prospects of reaching a solution that minimises harm to your credit and finances are stronger the sooner you contact your lender. A deferral, which permits you to skip one or two monthly payments without resulting in default or repossession, may be used to resolve a brief cash flow problem. Although the payments—including interest—are added to the end of your loan, you will still be responsible for the debt.

  You might be able to work out a modified payment plan for the remaining balance of your loan if your credit is still strong and you can prove that you will be able to make future payments. Any modification to your initial loan arrangement, such as a deferment or new payment schedule, should be in writing to prevent future confusion regarding missed or altered payments.

  Here are some other options to take into account:

  Sell the vehicle. Selling your automobile is one alternative if you just cannot afford your car payments any longer; ideally, you should do this before missed payments start to happen frequently. You might be able to earn enough cash to completely pay off your loan and have extra cash to put towards a new, less expensive car. In addition to saving yourself the expense and hassle of a repossession, even if you don't collect enough money to pay off your loan balance, you might still be able to recover more money than your lender would if your automobile was sold at an auction.

  restructure your loan. You might be able to refinance your loan balance with another lender if your credit is good. The remaining balance of your loan can be easier to handle with lower interest rates or a longer payback period.

  Think of a willing surrender. You could wish to willingly give your car to the lender if losing it is unavoidable. Even though a voluntary surrender has almost the same bad effects on your credit as an involuntary repossession, it may nevertheless help you keep your dignity and earn some favour with your lender. By avoiding using a tow truck, you could also save some money.

  How to Rebuild Your Credit After a Foreclosure

  After a repossession, credit repair requires time. Most of the time, the solution is to reduce debt, make timely payments on balances, and exercise caution when taking out new loans or lines of credit. The impact of the repossession will lessen as it approaches: Credit rating methods frequently favour fresh data over stale data.

  You can follow your development by keeping an eye on your free FICO® Score and credit report on a regular basis. After seven years, your repossession and all associated late payments and collections will be immediately removed. They won't have an impact on your credit score after that.