About Car Repos
A lender repossess a car when a borrower defaults on a car loan. A car repossession can have a very negative impact on a credit score. There is no set amount of percentage points that a credit score will be reduced by. However, a car repossession will lower a credit score significantly.
Types of Car Repos
There are two types of car repossessions: voluntary and involuntary. A voluntary repo is when the borrower voluntarily gives the car back to the lender. An involuntary repo is when the lender has the car repossessed without the borrower's consent. Both types of repossession negatively impact the credit score. A person who has a car repossession reported on her credit report can have a difficult time obtaining future loans, because the repo shows as a history of failure to pay off loan obligations.
Outstanding Loan Balance After a Car Repo
A car repossession can hurt credit in other ways also. When a car is repossessed, the lender sells the car at an auction, to try and recover as much money as possible. Usually the cars do not sell for a lot of money at the auctions, leaving a remainder amount still due by the borrower. The borrower is still responsible for paying off any remaining balance owed to the lender. The balance owed is reported as a debt on the borrower's credit report.
Judgement After Repo
If a borrower owes an outstanding balance after a repo and does not pay it to the lender, the lender may sue the borrower in court. If the lender wins a judgement against the borrower, the judgment can be reported on the borrowers credit report. A judgment will certainly have a negative impact on a credit report.
Damaged Credit After Repo
A repossession can affect a persons' credit for up to seven to 10 years. The reported repo, the outstanding debt and a possible judgment can each lower a credit score. The three items combined damage a credit score even further. A car repo can make it harder for a person to get future loans. In some instances, the person may be able to get a loan with a lender that specializes in bad credit loans, but the interest rates will be higher than average.
Avoiding a Car Repo
It is better to avoid a car repossession if possible. Try two ways to prevent a repossession.
1) Sometimes a lender will help a borrower get current on payments by altering payment times so that the borrower can get a new start. Different dates can be set on the payments to help the borrower get caught up. Or the loan can be reorganized so that the past due payments are forgiven and get added onto the end of the loan, making the loan current instead of past due.
2) Selling the car to pay off the loan is a better alternative than repossession. This is only a viable option if the car can be sold for at least as much as the outstanding balance due on the loan. If selling a car that has an outstanding loan, the lender or contract should be consulted first. Some loans have early payment penalties, meaning if the loan is paid off early, an extra fee will be charged. Some loans don't have early payment penalties and instead are cheaper if paid off early. If paid off early, interest is recalculated to reflect the shorter loan period, making the outstanding balance less. Depending on the loan, a sale of the vehicle could make the outstanding loan balance more or less than expected.
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