What Happens to Your Credit When Your Car Is Repossessed?

If you can't afford to pay cash for a car, then you may consider taking out an auto loan to cover the costs. A loan is a credit-based transaction and how you handle that credit obligation will appear on your credit report. Failure to make payments on a car loan can lead to a repossession, so it's helpful to learn how a repossession affects your credit.

Identification

When you obtain a car loan to purchase a vehicle, the car serves as collateral for the loan. The lender of that loan expects payment based upon the agreed-upon terms. If you fail to pay the amount due, the lender make take possession of the car. This is called a repossession. Repossessions can be voluntary, where you turn in the car yourself after realizing you can no longer make the payments, or involuntary, where the lender hires a tow truck to come pick it up.

Significance

Both voluntary and involuntary repossessions are listed on your credit report as a repossession. A repossession is one of the most devastating items to have on your report. Your credit, or FICO, score ranges from 300 to 850 and 35 percent of that score measures how well you pay your bills. A repossession shows that you failed to honor a credit obligation and thus it will lower your FICO score. How much your score drops depends upon the other factors present on your report.

Considerations

Although your credit score will drop once a repossession appears on your report, the damage to your credit isn't permanent. As the repossession gets older, or ages, it will have less of an impact on your credit score. According to MyFico, making on time payment on all of your debts will cause your score to increase over time. Also, another 30 percent of your FICO score is the amount of debt you have. Reducing your overall debt load will gradually help raise your score as well.

Warning

Even if a lender repossesses a car, that action doesn't terminate your legal responsibility to repay the debt. The lender will auction off the car in an effort to recoup some of the monies owed. The difference between what the lender receives at the auction and the outstanding amount of the loan is called the deficiency. You are responsible for the deficiency and as such, the lender will seek to obtain payment from you. The lender may turn the debt over to a collection agency or sue you in court to obtain a judgment against you for the deficiency amount. A judgment may allow the lender to garnish your wages or seize funds in your bank account.