When you agree to purchase a vehicle, home or other property, there’s a clause written into your contract that says the lender can take possession in the event of default, or failure to make payments.
The truth is no one wants to deal with repossession. It’s costly for the lender, and bad for the consumer who’s left without an automobile or place to live.
Plus, it’s terrible for your credit score.
What is repossession?
When you buy a big ticket item like a car or home, you of course have the option to purchase them with cash. But most people finance these, using the automobile or house as collateral for an installment loan.
Collateral is anything that secures a loan’s value, which protects the lender and provides a lower interest rate for the borrower. Because cars and real estate are tangible property, the lender can seize them if you stop making payments. This process of taking back collateral – your vehicle or place of residence – is repossession.
What causes repossession?
When a borrower stops making payments, the lender can start the repossession process.
Each state has different laws a lender must follow before, during and after repossessing property. To check the laws that apply to you, see your state’s automotive or real estate installment sales acts which state what steps your lender must take before attempting to repossess property, including how much notice they’re required to give you, if any. Here’s a reference for every state’s auto repossession laws.
It’s a good idea to know your rights in case the lender doesn’t follow the law in the process of repossessing property.
What would repossession do to your credit score?
According to one source at CreditCards.com, a repossession can cause your credit score to drop 100 points. That could be a huge blow to your score, especially if it’s not high to start with.
In addition, the repossession – and the late payments and collections that led up to it – can stick around on your credit file for seven years. So, if you want to finance another vehicle, having this information on your credit report could prevent you from getting approved for a long time.
See if you can work something out
The best way to avoid repossession is to make payments on time. If that’s not possible, the next best solution is to reach out to your lender and tell them you’re having trouble making payments. They may be able to work out a solution, like a payment plan, forbearance, or waived payments for a month or two.
And your lender would prefer this too. Why? Repossession is expensive for a lender.
It can also be expensive for you. Because if you want your property back, you’ll have to pay any past due amounts, accrued interest, late fees and the cost of repossession.
And honestly, neither party wants to go through the hassle.
So, if you fear you might slip behind, reach out and see what you can arrange. Most lenders would prefer you to skip a couple of payments with their permission than have to go through the hassle of claiming back your car or house.
What other options do you have?
Besides deferring your payments directly with the lender, you could also try to refinance your loan. This could help you by lowering your monthly payments or stretching out the loan term (or both). Plus, when you refinance, you often get a grace period of a month or two before your first payment is due. This could give you some wiggle room and preserve your payment history.
Another option is to sell the property, whether it’s a car or house, on your own. If you can sell, you can then use the money to pay off the loan completely. This wouldn’t work if you owe more than the item is worth. But if you can cover the difference, it’s an additional way to avoid repossession.
Repossession and your credit score bottom line
If something you own, like a vehicle or piece of real estate, gets repossessed, the effect on your credit score can have immediate and long-term effects. In the short-term, your score could drop 100 points or more. Long-term, it could stick around on your credit file for up to seven years.
That’s why it’s best if you can avoid the repossession process altogether by working something out with your lender before it gets to that point. It’s costly, and everyone wants to prevent that from happening.
If you think missing a payment is inevitable, consider taking out a loan to cover yourself for a month or two, like those offered with Jora Credit. Click here to see if we offer loans in your state and begin the application.