When Can a Car Be Legally Repossessed?

Consumers may take out an auto loan to pay for a car. One important element of a loan is the borrower's responsibility to repay it, usually by making monthly payments. Based upon the loan agreement, the lender has certain rights if you default on that loan, so it's wise to understand when a car can be legally repossessed.

Significance

Any time you fail to honor the terms of your loan agreement, the lender can legally repossesses the car. This occurs most often, however, when a borrower fails to make payments on a car loan. In this case, the lender may hire a tow truck to come to your home or place of employment to retrieve the car. This is called an involuntary repossession. A voluntary repossession occurs when you return the car to the lender on your own.

Consequences

According to Financial Web, a repossession is one of the most devastating items to have on your credit report. The data in your report determines your FICO credit score. Thirty-five percent of your FICO credit score reflects how well you pay your bills. A repossession demonstrates that you did not honor your loan obligation and it will lower your score. How much damage occurs to your score will depend upon the other factors in your report.

Considerations

The repossession of the car does not end your financial responsibility for the loan. The lender will sell the car at auction in an effort to recover some of the money still owed on the vehicle and then will expect you to pay the deficiency. Deficiency is the difference between the amount of the balance owed on the car and the amount the car was sold for. You are legally obligated for this debt, and the lender may attempt to collect it.

Warning

If you fail to pay the deficiency amount, the lender can take certain steps. It can turn the debt over to a collection agency. This agency will place a collection account on your report. In addition, depending upon the amount, the lender or the collection agency may sue you to obtain a judgment. A judgment will allow the judgment owner to potentially garnish your wages or seize money in your bank accounts to pay the debt.