Unfortunately, a repossession does negatively affect your credit score, and it stays on your credit reports for up to seven years. While its impact on your credit lessens over time, a repo on your credit reports can still make it difficult to get approved for an auto loan in the future. If you’re wondering how a repossession affects your credit score and how you can avoid it, keep reading.
How a Repossession Hurts Your Credit Score
Did you know that there are four steps involved during the repossession process, and that each of them negatively impacts your credit score? Just how badly each step affects your score depends on where your credit score stood at the start, and how deep you go into the repo process.
If you end up dealing with repossession, these are the steps that you go through:
- Default – Once you default on the loan by missing a payment, you run the risk of having your vehicle repo'd. How long it takes before a lender chooses to repossess depends on your contract; some lenders act immediately, while others wait 60, 90, or 120 days past the missed payment. However, the longer you continue to stretch out the time after the missed payment(s), the more your credit score is going to drop.
- Repossession – When the repo occurs, it gets listed on your credit reports and lowers your score yet again. It either shows a code 08 (repossession), or code 8A (voluntary repossession).
- Collection – After your car is taken, the lender usually sells it at auction to pay the remaining loan balance. If the vehicle sells but there’s still a balance remaining, you’re responsible for paying it. If you don’t, it’s possible for the lender to send your account to a collection agency, which also shows up on your credit reports and lowers your score.
- Judgement – It's possible for a creditor to sue, get a judgment against you, and garnish your wages. As of 2019, judgments no longer affect your credit score, according to Experian. However, you shouldn’t let the situation get to this point.
How to Avoid a Repossession
If you’re worried about losing your car, there’s the possibility of avoiding repossession before it ever happens. Here are some of the options you can explore to avoid a repo.
If you suspect you’re going to miss the next payment, it’s important you talk to your lender as soon as possible. They don't want to go through the repossession process any more than you do, and may be willing to help you if you contact them early enough.
A common thing that lenders may allow to help you avoid repossession is a loan deferment. This is when you skip the next month’s payment and the lender either tacks it onto the next payment or to the end of the loan term.
If they won't do this, and you’re struggling with the monthly payment, they may suggest that you refinance. You may be able to qualify to refinance as long as your vehicle has equity (is worth more than what you owe on the loan) and your credit score has improved since taking out the initial loan.
Finally, the last option for avoiding repossession is to file bankruptcy. This should be a last resort, since filing for bankruptcy is a big decision to make. Keep in mind that there's no guarantee that you can keep your car if it’s not covered under your state’s exemption limit for a Chapter 7 bankruptcy, or if you don’t qualify for a Chapter 13 bankruptcy.
Need a Vehicle Post-Repo?
A repossession is a negative mark on your credit reports. Unless you can stop it from happening, you’re going to face the consequences of a lower credit score. However, just because your credit is tarnished due to a repo doesn’t mean you can’t finance another vehicle. You just need to work with the right lenders, and we can help you get started.
At Auto Credit Express, we’ve helped consumers dealing with unique credit situations get the financing they need for over 20 years. Our partner dealerships have the right type of lenders for people with imperfect credit.
Simply complete our easy and free auto loan request form to get the process of getting matched with a local dealer started today.