How Long Does a Car Repossession Hurt Credit?

Credit is hurt by various negative actions. People who stop paying their bills or frequently send in late payments and those who have property seized because of defaults have trouble getting new loans and credit cards. These negative actions all show up on their credit reports. Car repossessions are an example of a harmful item.

Definition

Car loans are secured loans with a vehicle as collateral. The repayment term usually runs up to 60 months or sometimes longer. The Federal Trade Commission (FTC) explains that lenders write default terms in their contracts letting them seize the car if the borrower stops paying. This is called a repossession, and it can happen at any point in the term of the loan, even if they buyer stops sending money after several years of payments.

Effects

Car loans in good standing have a positive effect on credit. FICO, a major credit score company, explains that car loans are part of a person's overall credit payment history. This counts as 35 percent of the FICO score. A repossession is reflected on the credit reports compiled by TransUnion, Equifax and Experian, the three major credit reporting companies. A repossession knocks down the credit score and warns creditors that a major financial obligation was neglected. Car buyers who lose their vehicles to repossession may be denied for other credit or charged very high interest rates on new accounts.

Time Frame

The FTC warns that car repossessions appear on credit reports for seven years. The reporting period begins when the first payment was skipped. Banks, creditors, employers, insurers, landlords and others who pull credit reports to evaluate people for credit, housing, insurance and jobs all see the repossessed car for that entire time. The bureaus automatically purge it from their files when seven years ends.

Considerations

Car repossession is always bad to have on a credit record, but FICO explains that credit is rebuilt over time with positive activity like paying other bills promptly. Most creditors focus on recent accounts and activities and give less weight to old mistakes if current financial records are excellent. Pay all bills by the date due, do not open too many credit accounts, and maintain low balances to offset losing a vehicle in the past.

Prevention

Banks and other car loan providers have no legal obligation to work with financially troubled consumers, but the FTC explains that some will try to do so if the car owner calls and requests help. The lender might allow a late payment or alter the monthly due date so it fits in better with a person's paydays or budget. Bankruptcy stops repossession, according to the FTC, but it negatively impacts credit for three more years than a repossession, as it stays on credit reports for a decade.

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What Does "Auto Refinance" Mean?

To refinance an auto, you must apply to a different lender to transfer your loan balance. Your new loan provider pays off the previous loan balance and becomes the new lien holder. Reasons for pursuing an auto refinance vary, but most borrowers refinance to save money or to obtain a lower interest rate.

Benefits of Refinancing

You can lower your interest rate by refinancing your current loan and save money over the term of your loan. If interest rates drop, refinancing offers an opportunity to take advantage of lower rates. Or, if your credit has improved since you originally took out your loan, you may qualify for a better rate. You can also refinance to extend your car loan or put money down toward the loan amount to ultimately lower your monthly payment.

Determine Your Finances

Before you apply for a refinance, determine your financial goals so that you can shop and apply accordingly. Use an auto loan calculator (see Resources) to view different loan options and which lending scenario saves you money or lowers your payment. Calculate your total payback amount, monthly payments with a new rate or extended term, or how much you can save if you put money down.

Refinance Requirements

Refinancing requires good to excellent credit. If you owe more than your vehicle is worth, you may not obtain an approval for the requested loan amount unless you have money to put down. Or, if your credit has suffered since the time you originally borrowed, you might not obtain a better interest rate. Banks determine loan amounts by reviewing your credit information and the vehicle's value. Depending on your credit standing, you may be approved for 60 percent to 120 percent of your vehicle's value.

Refinance Process

Search used-car rates offered by different lenders. Call to find out the rates; used-car offers aren't always advertised. Once you find a suitable lender, you can expect to provide the same information as you did for your original loan. You must fill out a credit application and provide detailed vehicle information, such as year, make, model, level, options and VIN (vehicle identification number). Once approved, your new bank pays off your old loan. Expect to sign a new contract, as well.

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How to Quit a Claim on a Joint Purchase Automobile

Buying a car with another person results in a joint purchase. Both parties sign the car title and have ownership of the vehicle. But if situations change, and you want to remove your name from the car title and give up ownership, you can quit a claim and transfer complete ownership to the other person.

Instructions

1

Talk to the other party about removing your name. Situations vary, and in some instances, you don't need permission from the other owner to take your name off the title. Review the title first, and if the title reads "and/or" between both names you can remove the name without the other person's consent. On the other hand, if the titles includes "and" between both names, both parties must agree to the removal.

2

Sign the back of the title to transfer ownership. The recipient also signs the document to complete the transfer.

3

Submit the title to the Department of Motor Vehicles to finalize the transfer. The DMV will update the vehicle's information in its system and then create a new title and tags for the car. To avoid mistakes when filing the sections of the original title, you can complete signing of the title at the DMV in front of a representative.

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Can I Extend My Auto Lease if it Is About to End?

If you frequently lease vehicles, extending might save you thousands in fees. Your lease may not have an option to renew the contract, but you can usually negotiate one anyway. Ultimately, the value of the car at the end of the lease will probably be the deciding factor for whether or not you should renew the contract.

Identification

You can extend an auto lease if your contract contains a clause allowing you to renew. When your lease agreement does not have an option to renew, you might be able to negotiate for a renewal by asking the car dealer for one. However, unless your contract specifically gives you the option, a renewal is no guarantee.

Benefits

In generally, extending an auto lease costs less than buying a new lease, because the dealer will not charge initial fees, such as a down payment on the car or a security deposit. The lease might also charge a lower monthly premium, because the car has depreciated in value --- lease agreements only make you pay for the depreciation in the value of the car plus an administrative fee.

Should You Extend?

If you are concerned about making the best financial decision, determine the value of the car. It is usually cheaper to purchase the vehicle at the end of the lease --- most lease options give the consumer the option to buy the vehicle outright after leasing it --- when the value exceeds the cost of the lease. Dealerships have to estimate the value of a car to set the price on a lease. If the dealer underestimated the depreciation, you can make a profit by buying the car and reselling it.

Tips

Get a quote on a vehicle lease extension from your current provider and a quote for a similar vehicle make and model from another dealer. Most areas have several leasing agents for any particular car make and model. If you are leaning towards extending your lease, factor in your maintenance during the original agreement. You may, for example, not have changed the oil or performed other routine work, which could make the car unreliable in the future.

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How to Calculate Auto Financing

Calculating the financing for an auto can give shoppers a giant head start on the purchasing process. Often people are blown away by the initial sticker shock of a vehicle, but are overcome by an aggressive salesman promising to get the buyer into an affordable monthly payment. Sometimes this incurs hundreds or thousands of dollars paid over the life of a loan that could have been avoided by simple planning. Having the knowledge how to calculate--and prepare for--auto financing gives buyers additional leverage before ever stepping foot on the dealership lot.

Instructions

Calculating the Financing

1

Sum all costs of the vehicle including the MSRP (manufacturer's suggested retail price or sticker price), add-ons such as 4-wheel-drive and air conditioning as well as the destination charge (often between $300 and $600) and any preparation fees. If you negotiate the sticker price to something less, include only the amount you negotiated. This total is the base price.

Example: $15,000 MSRP + $1,000 4-wheel drive + $250 CD player + $350 destination charge + $50 preparation fee = $16,650 base price

2

Subtract the value of your trade-in (if applicable) from the base price. If the vehicle being traded has negative equity (meaning the amount owed on a loan is more than the value of the trade), you will add the difference to the base price. This is the net equity of the purchase.

Example: $16,650 base - $1,500 trade value + $2,225 left on loan = $17,375 net equity

3

Multiply the base price by your state's sales tax as well as local tax. The combined average typically is around 8 percent but varies by location.

Example: $16,650 * 8.5 state/local tax = $1,415.25 total sales tax

Note: In situations where there is a trade-in, and the trade value exceeds any remaining loan amount, some states allow for deducting the trade value from the base price before configuring the sales tax.

4

Multiply the base price by your state's title and registration rate for finding the transfer fees. These fees are often an additional 1 to 1.5 percent.

Example: $16,650 * 1.5 percent BMV transfer fee = $249.75 title fees

5

Add the net equity, sales tax, title fees and any additional document fees or extended warranty purchases. Subtract the amount of the down payment, if any. This is the amount being financed. Most states allow document fees and warranties to be non-taxable, though there are always exceptions.

Example: $17,375 + $1,415.25 + $249.75 + $750 (warranty plan) + $125 (document fees) - $2,000 down payment = $17,915 amount to finance

6

Multiply the principal (financed amount) by the periodic interest rate (interest rate divided by 12 months in decimal form) to begin finding the amount of the monthly payment. The interest rate is commonly between 7 and 10 percent, though persons with excellent credit will see rates as low as 2 to 3 percent and individuals with poorer credit histories will have rates at 14 or 15 percent. We'll call this the base amount.

Example: $17,915 financed * (8.9 percent or .089 / 12) = $17,915 * (.0074) = $132.57 base amount

7

Add 1 + the periodic interest rate (again in decimal form) and raise the sum by minus the ideal number of monthly payments. If you wanted a loan that lasted 5 years, you would use (-60) as the exponent. We'll call this the term multiplier. To adjust the final payment amount, you can always play around with the loan length to fit into a budgeted monthly payment--just like those sneaky sales people do with unsuspecting buyers.

Example: (1 + .0074 or 1.0074) ^ -60 = 0.6425

8

Subtract the term multiplier from 1. Divide the base amount by this result to find the monthly payment amount.

Example: $132.57 / (1 - .6425) = $132.57 / (.3575) = $370.83 monthly payment

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Can You Make a Down Payment on a Car When in a Debt Program?

Debt management programs are effective tools in helping people get out of debt, but they also restrict people from obtaining new credit. The rules about what you can apply for and when you can apply for them can be quite confusing. This is especially true if you're on a debt management program and you want to buy a new car.

Debt Management Programs

Signing up for a debt management program is both a blessing and a curse. The good part about these programs is that you get huge interest rate reductions, allowing you to pay down your debt in a fraction of the time it would take you otherwise. The downside is that all of your credit cards will be closed and you will be unable to apply for any new cards while on the program. In addition, your status on the program will be reflected on your credit report.

Impact on Credit

Though your enrollment in a debt management program is reported by those creditors you're paying through the program, the debt management program itself doesn't have any impact on your credit score. The extent to which your credit is affected by your debt management program is determined by how long you've been on the program and how damaged your credit was before you joined. If you've been on the program for a while, you should have a nice history of on-time payments, which will help your score significantly. On the other hand, if you just joined and had credit problems recently, this will reflect badly on your worthiness to secure a car loan.

Buying a Car

There is nothing about a debt management program that restricts you from buying a new car. However, if your credit score is borderline, the financing company may notice your status on a debt management program and consider it as a negative. In this case, you may benefit from giving a higher down payment so that you don't have to finance as much. No matter how much you put down, it's likely that the dealership or finance company will try to use your debt management program against you in an attempt to make more money off of you. (See Reference 2)

Managing Your Payments

Buying a new car is sure to add hundreds to your monthly expenses. Before you agree to anything, make sure you can handle the additional hit to your monthly budget. Missing a payment on either your car loan or your debt management program can have serious consequences. Your creditors will likely drop you from your debt management program if you miss just one payment, whereas an auto finance company can legally repossess your car if it's even one day past due. This is another instance where a bigger down payment can benefit you, as it'll make your monthly payments more manageable.

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How to Mathematically Calculate a Car Loan's Amortization Schedule

A typical car loan has a term of 48 to 60 monthly payments. The amortization of a level payment loan, like an auto loan, will have higher interest charges associated with the early payments and in the later payments more of the payment is principal to pay down the loan. A car loan will amortize at a set pace with each monthly payment. The math can be handled with a calculator and piece of paper.

Instructions

1

Divide the annual interest rate for the car loan by 12 to obtain a monthly interest rate. For example, if the annual rate is 9 percent, dividing by 12 gives a monthly rate of 0.75 percent.

2

Multiply the monthly interest rate times the original loan amount to calculate the interest portion of the first monthly payment. For the example, the car loan was for $20,000. Multiply $20,000 time 0.75 percent for an interest amount of $150.

3

Subtract the interest for the first monthly payment from the payment amount to get the principal amount of the first payment. The example loan has a payment of $415.17, so the principal amount is $265.17.

4

Subtract the principal amount for the payment from the loan balance. After the first payment, the loan balance on the example loan would be $20,000 minus $265.17 equals $19,734.83.

5

Write the first line of the amortization table, making columns for interest, principal and loan balance. Use the calculated figures under each column.

6

Calculate the interest, then principal for the second payment using the new loan balance to calculate the interest for the payment. Repeat this step for each payment of the car loan.

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