Your FICO credit score ranges from 300 to 850 and, according to the MyFico website, the higher the score, the better your credit. Credit accounts, such as an auto loan, appear on your credit report. If you have a car loan, it's helpful to learn what impact a repossession will have on your credit.
What is Repossession?
A repossession occurs when a lender takes possession of a car from the owner after the owner fails to make car payments as agreed. The terms of the loan agreement grant the lender the right to do so without further notice. The lender will send a tow truck to retrieve the car. This is known as an involuntary repossession. If the consumer turns the car in willingly, this is known as a voluntary repossession.
How Does it Affect Your Credit Score?
Lenders report your payment history to the credit bureaus. Your credit report reflects how you have handled your debt obligations. According to MyFico, 35 percent of your score measures how well you pay your bills. One 30-day late payment can drop your FICO score by as much as 110 points, according to Bankrate.com. The later the payment, the worse the damage. A repossession means you neglected to make payments on a car loan. This will cause your score to fall. How low your score falls is determined by the other credit items contained in your report.
Be Aware
According to the Federal Trade Commission, once a lender repossesses your car, the lender will then sell the car to recover some of the debt owed. That, however, does not terminate your obligation for the debt. The lender can collect from you the deficiency amount. Deficiency is the difference between the amount you owe the lender versus the amount of money the lender was able to sell the car for. You are legally responsible for this bill.
Serious Considerations
Your credit report will reflect the negative payment history from the loan made with the original creditor. Some lenders, however, will hire a collection agency to collect the deficiency amount or will sell the deficiency debt to the agency outright. This agency will place a collection account on your report, which further lowers your credit score. Also, the lender or the agency can sue you for the deficiency amount. A judgment against you will also appear on your credit report as a public record and, consequently, will drop your score even further. Plus, it may give the judgment owner the right to garnish your wages or seize the funds in your bank accounts.
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