A recent USA Today article stated that 1-in-26 car loans were late by 90 days or more in the first quarter of 2017. Unfortunately, falling behind on payments is all too common. Emergencies happen or certain circumstances, like the loss of a job, put a strain on your budget.
If you’re behind on payments, it’s possible that your vehicle will be repossessed by the lender. Your vehicle is considered collateral under the terms of the loan agreement, so the lender has the right to take back the car or truck if there is a lapse in payments.
If you anticipate that a repossession is coming, should you voluntarily surrender the vehicle instead? How does each circumstance affect your credit?
What to Do Before Repossession
First and foremost, if there’s a chance that your vehicle will be repossessed, you should take the following actions in preparation:
- Remove all purchase and loan documents from the vehicle.
- Remove all personal belongings from the vehicle.
- Note the current odometer mileage.
- Take photographs of the vehicle's interior and exterior.
- Request that the lender provide you with a written loan payment history.
- Request that the lender provide you with a payoff figure.
- Do not hide or conceal the vehicle to avoid a repossession.
This will ensure that you have all the information you need along with your personal belongings should a repossession take place.
How a Voluntary Surrender and Repossession Affect Your Credit
Many consumers who anticipate a repossession wonder if the consequences will be less negative if they voluntarily surrender the vehicle to the lender. The only significant difference between the two is the way they appear on your credit report; a voluntary surrender will be listed as such, but the negative effect will be about the same as a repossession. It’s possible, however, that the lender will be more willing to enter a loan agreement with you in the future if you voluntarily surrender the vehicle.
A repossession can stay on your credit report for up to seven and a half years. It’s a negative listing that lowers your credit score and it can make it more difficult to secure a new loan or line of credit.
Discuss Your Options with Your Lender
If you are having difficulty making payments, contact your lender as soon as possible. They may offer deferred payments, which are applied to the end of the loan. This can help you avoid repossession or voluntary surrender and prevent your credit from taking a further hit.