Your auto loan is secured by the vehicle itself. Thus, should you stop paying the auto loan, your lender will hire someone to go to your home or place of employment and repossesses the car in lieu of payment. Not only does repossession leave you without transportation, it also severely damages your credit rating---making it challenging to obtain another auto loan for a replacement vehicle.
Credit Impact
The derogatory credit effects of a repossession vary depending on the individual and how much negative and positive information is already present on his credit file. The credit scoring formula is a trade secret and only the Fair Isaac Corporation---the company responsible for "FICO" scores---has access to it. Thus, there is no way to estimate the damage a repossession will do to your credit before it occurs. On average, repossessions generally cost consumers 100 to 150 points.
Voluntary Repossession
If you know that you can only continue making car payments for a limited amount of time before you will no longer be able to afford your loan, you have the option to return your car to your lender. Doing so is commonly referred to as "voluntary" repossession.
While voluntary repossession saves you from having to pay the towing and storage fees your lender incurs when it seizes your vehicle, it does not lessen the negative effect the repossession has on your credit rating.
Reporting Period
The Fair Credit Reporting Act notes that an auto repossession will remain a part of your credit history for seven years. After seven years, the record of your previous auto loan and the repossession that followed will vanish from your records.
Even though the repossession stays on your credit record for seven years, its negative impact on your credit scores diminishes over time. The more recent an entry is, the greater the effect it has on your scores. Thus, your credit suffers the most from a repossession immediately after it appears on your file.
Additional Damage
After repossessing your vehicle, the lender sells it. It applies the funds recovered through the sale to your remaining auto loan balance. In some cases the lender cannot sell the car for enough money to erase your balance. Should this occur, you still owe the remaining deficiency.
If you do not make arrangements with your lender to pay off your auto loan deficiency voluntarily, the lender can sue you and obtain a court judgment against you---which also appears on your credit report. Because judgments are derogatory, your credit score will suffer even further.
0 comments:
Post a Comment