Falling behind on your car loan serves as a notice to the lender that you're in trouble financially. Most lenders will wait---either by law or by choice---before repossessing your vehicle. If you cannot begin paying on your loan, the lender will repossess your car. An auto repossession will have numerous negative effects on your credit report, and will prevent you from obtaining another auto loan for at least six months.
When Repossessions Occur
Most states stipulate that lenders must wait until a person is two months past due before attempting to repossess the person's vehicle. Although the lender has the legal right to repossess your car after two months, most elect to attempt to recover the funds before resorting to repossession. If they deem that fund collection is unlikely, they must repossess your vehicle in attempt to reclaim the money lost on the loan.
Future Auto Purchases
Auto loan lenders take a long look at your credit score before approving you for a loan. Having a negative mark, such as a late payment, doesn't necessarily mean the lender will deny you the loan. However, lenders look at repossessed cars in an entirely different manner than a typical late payment. Most lenders will refuse you for an auto loan after repossession. Regardless if you have a large down payment or a co-signer, most lenders will simply not risk taking you on immediately after repossession. Carsdirect.com suggests waiting one to two years after repossession before applying for another auto loan.
Seven Years
The history of a car repossession will stay on your credit report for seven years. The only way you can remove repossession from your credit report before it is automatically removed is by contesting the repossession. If you believe the lender made a mistake in repossessing your car, you can challenge the lender to show proof that your loan is delinquent. The good news is that repossessions have a diminishing effect; the older a repossession report, the less effect it can have on your credit, according to Experian. After seven years, your credit report will show no history of the repossession.
Late Payments
The negative effect of repossession is often compounded by late payments. Since repossession means that you were at least 30-days late on your loan, the lender probably reported you to the three major credit bureaus for a 30-day late payment. A 30-day late payment has far less repercussions than repossession, but it still shows up as a negative report in your credit report.
Interest Rates
When your credit score goes down, lenders, especially credit card companies, may choose to increase your interest rate. A lender may not subject you to a rate increase for a 30-day late payment, but they almost certainly will if you lose your car to repossession. The interest rate applies to any existing and future outstanding balances.
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