Is Credit Affected by Repossessed Vehicles?

Vehicle repossessions cause problems by taking away a person's transportation, which may be needed to get to school, a workplace or other important destinations. There is also a major, long-lasting impact on the person's credit records. Lenders view repossessions as negative and weigh them with other factors in credit decisions.

Definition

A vehicle repossession is an action in which a car loan company claims the vehicle because the debtor defaulted on the payment contract. Carreon and Associates, a law firm focusing on credit issues, explains that most contracts are violated when a payment is late or skipped. Some lenders agree to accept late payments, but most states allow them to take the vehicle if they wish. Most state laws let repossessors take cars at any time of day without notice from almost any location, including private property.

Effects

A repossession brings down a person's credit score significantly because it shows the consumer was unable to meet a major financial obligation. The effect is worse if the person does not have several other accounts in good standing to offset the repossession. FICO, the biggest credit score company, explains that delinquent payments leading up to the incident also hurt credit records. A person whose vehicle was reclaimed by the lender may have a hard time getting other loans and credit cards and may be denied by insurers. FICO recommends paying down other account balances and making every payment by the due date to negate some of the repossession's effects.

Time Frame

A vehicle repossession stays on a person's credit reports for seven years, according to Carreon and Associates. During that period, it is visible by anyone who reviews the report and can be considered in credit, insurance and employment decisions, the Federal Trade Commission (FTC) advises. Its impact is negated by recent good credit records as time passes.

Prevention

A car owner can get a repossessed vehicle back by paying the full amount of the loan, plus reasonable expenses, before it is resold. It then shows as a paid account on credit reports, although the prior delinquent payments are still there and still negatively affect the credit report. Some creditors let consumers redeem their cars by catching up on payments, but they are not required to do so, Carreon and Associates explains.

A consumer can stop a repossession by filing bankruptcy because the court grants a "stay" that forces lenders to cease collection efforts, but the bankruptcy itself is devastating to credit records.

Considerations

Some consumers get repossessions erased from their credit records prior to the seven-year reporting period because of inaccuracies. The FTC explains that the federal Fair Credit Reporting Act lets people dispute any mistakes on their reports. Lenders and repossessors often make errors in their records that get reflected on credit reports, according to Carreon and Associates. Any consumer who finds such errors can dispute them with the credit reporting bureaus: Equifax, Experian and TransUnion. The credit bureaus must erase the repossession if the lender cannot provide correct information or ignores the inquiry altogether. This eliminates its credit effects.