According to the U.S. Department of Labor, the unemployment rate for October 2010 was 9.6 percent, with 14.8 million people collecting unemployment compensation. When money is tight, people usually choose to pay for the essentials first: housing, utilities, food and medicine. Depending on the type of car loan you have, car repossession may occur as soon as the first missed payment is beyond the grace period, which varies by state.
Drawbacks for the Lender
Car repossession is usually a last resort for banks and loan companies. They earn a profit when you make your car payment every month, especially if you have purchased an expensive car with a five-year loan. Banks and loan companies incur several expenses when they repossess a vehicle, and there's no guarantee that they can resell it quickly or for enough money to cover the loan amount.
Features
Car loans often include more than the purchase price of the vehicle as part of the monthly payment. Loans may also have liability insurance and personal injury protection added on to the amount due. Falling behind on a car payment with this type of arrangement is a double blow to the vehicle owner. The late payment is reported to the credit bureau, and the car insurance is canceled and reported to the department of motor vehicles in his state of residence.
The Facts
Car repossession does affect your credit. You're defaulting on a loan, and the information stays on your credit report for seven years from the date of your last payment. Car repossession is a major black mark on your credit and lowers your credit score considerably. The lower credit score makes it more difficult to qualify for credit in the future: Loan companies may only offer terms with high interest rates and expensive fees.
Significance
Car repossession on your credit report can prevent you from renting an apartment or getting a job. Additionally, if you have cash or financial responsibilities in your current job, your employer may think negatively about you if you have bad credit. Your employer can choose to transfer you to a lower-paying position without financial responsibility or even fire you if you live in a state with at-will employment laws. Utility companies run your credit when deciding whether to require a deposit.
Considerations
You have to do whatever is best for your family situation, even if it means returning the car to the bank. Although car repossession is a negative mark on your credit report, a statement explaining the reason, such as job loss, may be sufficient for a potential landlord or employer who's reviewing your credit report.
Warning
Car repossession may not wipe the slate clean. If the vehicle is in poor condition or otherwise can't be sold, then you're still responsible for the balance of the loan. You also have to pay all fees for processing the repossession. The bank or loan company can get a court judgment against you; this also goes on your credit report.
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