How to Avoid Car Repossession

By Dawn Handschuh, Personal Finance Writer Archive

When money's tight, there are a lot of things you can do without, but your car's not usually one of them. Still, sometimes it's practically impossible to avoid missing a car payment. Here's what to do if you find yourself in this predicament:

• Contact your lender as soon as you know you won't be able to make a payment. Be prepared to share details about why you can't make the payment — did you lose your job or did illness sideline you for a few weeks? Whatever the reason, you'll need to be upfront with the lender if you hope to reach an alternative agreement and still keep your car.
  
• Win a 30-day reprieve, or refinance the vehicle. If you have a record of on-time payments and have a good credit score, your lender may let you defer payment by 30 days. Or you may be able to refinance your auto loan; it's possible you could lower your interest rate when you refinance. A third option would be to refinance at the same rate but spread payments out over a longer period of time, thereby lowering your monthly payments.
  
• Sell the car to pay off the loan. Determine what your payoff amount is (the balance you owe on the vehicle), then gauge the car's real market value by checking a website like Edmund's or Kelley Blue Book. If you owe less than what the car is worth, you could sell the car to pay off the loan.
  
  Of course, you won't be able to transfer title until the loan is paid off, so you'll need to arrange for advance payment with the buyer. Selling the car for cash you can use to pay off the loan is always a better decision than allowing a lender to repossess the vehicle.
  
  If, on the other hand, you owe more on the vehicle than it's worth, you'll have to come up with the extra cash to pay off the loan through a sale.
  
  It's never a good idea to roll over the balance you owe on one vehicle into the financing of a second vehicle.

If you do nothing after missing a payment, you can expect to be contacted by the lender within 30 days of non-payment. What happens next depends on your payment history, the lender's policies and the laws in your state of residence. Most states have laws that permit a creditor to repossess your car after loan default without going to court and without advance notice; these laws also allow creditors to come onto your property to do so. In some states, though, the law bars creditors from repossession through the use of physical force or threats.

If repossession looks inevitable, make sure to remove your personal belongings from the vehicle, since they may be difficult to recover later.

Under federal law, if you're an enlisted soldier on active duty and you purchased the car before you went on active duty, a creditor can't repossess the car without a court order.

Once a vehicle is repossessed, it's usually sold at auction at a highly discounted price. You'll still be required to pay the difference between what the car sold for and the remaining balance on the loan, which could be significant. This puts you in the worst possible position — having to make payments on a car you don't use or own.

Some states require creditors to notify you of the time and place of the auction. This allows you to attend and bid to buy back the vehicle by paying the full amount you owe, plus expenses related to the repossession, such as storage and attorney fees, according to the Federal Trade Commission.¹

Your skipped or late car payments will hurt your credit score, but a repossession and/or a "charge-off" (when the lender writes your loan off as a loss) will severely damage your credit and jeopardize your chances of qualifying for another car loan. This information will stay on your credit report for seven years.

Remember, it's much easier to prevent repossession from happening than it is to deal with it after the fact. Here are tips for avoiding this scenario from the start:

• Make sure you're fully aware of your financial obligations when you enter into a loan contract for a car purchase, and make sure it's doable for someone with your income.
  
• Know what your credit score is before you go car-shopping, because the most enticing advertised deals are reserved for those with top-notch credit scores. Prospective car buyers will often be lured into the showroom by assurances they'll qualify for a loan, only to find out later it's not at the most competitive interest rate.
  
• Don't let the excitement of a new car purchase blind you to the true cost of the purchase. Never sign a purchase agreement without knowing all the details about the financing, rate of interest and loan term. Do not take a vehicle home before the exact terms of financing are finalized. Pay attention to the total cost, not the monthly cost.
  
• Don't assume that financing through the car dealer is your only option. Often, local banks and credit unions can offer better rates on car loans.
  
• In the case of at least one car maker, Hyundai, you can rest assured that if, within a year of buying a new car from them, you lose your job, they'll take your new car back and release you from your contract.

Different states enforce different laws when it comes to repossessions. In some states, like Illinois, if a car owner has paid for more than 30% of the total purchase price, he can buy back a repossessed car by making all back payments owed plus late charges. If the car owner hasn't paid 30% of the purchase price, then the lender has the right to require payment of the entire loan before they give the car back.²

Contact your state attorney general for repossession laws in your state.

Footnotes
¹ "Vehicle Repossession: Understanding the Rules of the Road," Federal Trade Commission.
² "What to Do if Your Car is Repossessed," Illinois Legal Aid, April 2006