Many consumers finance a car using a car loan. If you fail to make payments on the loan, the lender may seize the car and charge off the debt as a loss. This is called a repossession. It's important to know how a repossession affects you and your finances.
Effects
According to FICO, 35 percent of your FICO score measures how well you pay your bills. A repossession shows that you defaulted on an auto loan. This is a major derogatory item to have on your credit. It will appear on your credit report for seven years and will have a negative impact on your credit score. How much your score drops depends on the other aspects of your credit report.
Significance
A repossession on your report may prevent traditional lenders from approving you for another car loan. You may receive approval from a subprime lender, which is a lender that specializes in loans to consumer with credit problems. These loans usually come with a higher interest rate, however. Such lenders may also require you to pay a larger down payment in order to qualify.
Misconceptions
Repossession of a car does not relieve you of the legal obligation to pay the debt. Once the lender has the car, it will sell it at auction to try and recoup some of the money owed on it. The difference between what the car sells for and the outstanding amount of the loan is called a deficiency. The lender will then come after you for payment of that amount. The lender may sell the debt to a collection agency or they may sue you in court to obtain a judgment against you.
Considerations
If a lender turns the debt over to a collection agency, that agency will place a collection account on your credit report for that debt. This will further lower your score since collection accounts are considered a negative entry on your report. If the lender obtains a judgment against you, that is considered a public record and it will appear on your report as well. FICO considers judgments negative and this can lower your score as well.
Warning
If the lender obtains a judgment against you for the unpaid balance of the auto loan, it can haunt you for many years. A judgment gives the holder of the judgment the right to garnish your wages, seize funds in your bank account or place a lien on any property you own, such as your home. Depending upon the state, the owner of the judgment may continue to try and collect on the debt for many years, even once it no longer appears on your credit report. In Florida, judgments have a statue of limitations of 20 years from the date the judgment was entered.
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