When a person falls behind on payments made toward a loan issued for the purchase of a particular object, such as a car, the lender may choose to repossess the object for which the loan was issued. Repossession badly damages a person's credit score, although some repairs can be made by paying off the loan after the repossession.
Features
Credit scores are calculated using a number of different factors. According to the Fair Isaac Corporation, the originators of the modern credit score, the bulk of a person's credit score is based on two factors: the person's previous credit history--namely the timeliness of her payments on loans--and the amounts currently owed. In addition, the length of the person's credit history, the amount of recently open credit accounts and the number of recent credit checks also affects the score.
Repossession
A repossession generally occurs after two or more payments have been missed on a loan used to purchase the object placed under repossession. When a payment is missed, the lender will generally report the missed payments to a credit reporting agency. The more missed payments and the larger the person's outstanding debt, the more harm will be done to the person's credit score. The repossession itself will also be noted and will remain on a person's report for seven years.
Repayment
According to Experian, one of the leading credit rating companies, repaying off a loan will not eliminate the damage done to a person's credit history. The repossession will still remain on a person's report. However, the score will improve by a small amount because the total outstanding balance that the person owes will decrease. The less a person owes--and the less he is delinquent on--the higher his score.
Expert Insight
Occasionally, people who have had objects repossessed find themselves faced with the choice of repaying the loan in full or accepting a settlement offer by the lender. According to Bankrate, a person with an otherwise healthy credit rating may want to forgo the settlement offer to and pay the debt in full, as this will be communicated to lenders on the report. However, if the rest of the person's credit history is blotched, the full payment will make little difference, leaving her better off paying the settlement and saving the money on a full repayment.
Prevention
Before getting to the point where the lender is attempting to repossess your object, attempt to negotiate an alternative payment plan. If that fails and repossession is imminent, voluntarily surrender the object: Some credit rating companies look more favorably on a voluntary repossession than an involuntary one.
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