When a person who has borrowed money to pay for a purchase falls significantly behind on their payments, the lender will often attempt to repossess the purchase as a means of paying off the debt. Repossession, which is tantamount to a borrower defaulting on a loan, has an extremely damaging effect on a person's credit rating.
Features
Lenders will generally attempt to repossess objects for which a loan has been specifically issued, such as a car, a boat or a home. According to the financial reference website Paying Paul, depending on state laws, lenders can sometimes even repossess a piece of property when the owner has not missed a payment if their financial situation has badly deteriorated or the property has lost significant value.
Effects
The precise damage that a repossession does to an individual's credit score varies depending on a number of factors, including their previous credit history. Thirty-five percent of a person's credit score is compiled based on the timeliness of their payments. If the repossession was preceded by a series of missed payments, the person's score will be damaged even more than it would by a simple repossession. This will make it far more difficult for the person to receive reasonable interest rates on future loans. The individual may also be required to put down higher deposits for rental apartments.
Types
Repossessions can either be classified as voluntary or involuntary. Under a voluntary repossession, the owner of the property agrees to give it up as a means of helping pay off the debt owed to the lender. Under an involuntary repossession, the lender must forcefully seize the property. A credit bureau rating your score will notate whether the repossession was voluntary or involuntary. While some lenders may look at the voluntary repossession as a sign that the borrower was willing to help erase the debt and thus view the borrower more positively, others will see no distinction between the two.
Time Frame
A repossession, once reported to credit bureaus, will stay on a person's credit report for seven years. Until the repossession is removed from a person's record, it will likely continue to drag down their score.
Solution
There are two main solutions to the damage a repossession does to a credit score. According to Lexington Law Firm, if the repossession was made in error, it can be legally disputed and possibly removed from a person's record. If the repossession was legitimate, however, a person's only solution is to attempt to build a better credit rating by taking out more loans and making timely payments.
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