How to avoid car repossession -- and what to do if your vehicle is repossessed

If you plan to get a loan to finance a car purchase, make sure you understand the repayment terms -- or you may end up having your vehicle repossessed.

Your lender will keep the title to your car until you've repaid what you borrowed to make the purchase, says Eric Tyson, an economist and author of "Personal Finance for Dummies."

If you fall behind on your payments, your lender has the legal right to reclaim the vehicle and resell it to recover the debt.

Typically, your lender will give you between 90 and 100 days to catch up with missed car payments before repossessing your car, says Alec Trueblood, a Los Angeles attorney who specializes in car repossession cases.

Tyson says you should contact your creditor as soon as you realize you'll be late with a payment. That will enable you to negotiate a modified repayment schedule. Often lenders are receptive to such requests. 

"Whenever you have a problem with repaying a loan, you generally are going to get better treatment and more options if you bring it to the lender's attention," Tyson says.

understanding car repossession How to avoid car repossession

It's easier to avoid a repossession than to try to reclaim a car that has been taken back. Once you're in default, most states allow lenders to repossess your car without notice.  Here are three tips for avoiding repossession:

  • Ask to have your loan reinstated. If you're in default, you may have the right to reinstatement, depending on the terms of your loan. If so, bringing your payments up to date will prevent repossession.

If the car already has been repossessed, a reinstatement enables you to get it back. After you bring your loan up to date, you must continue to make regular payments.

  • Redeem your loan. In most cases, someone whose car is repossessed has the right to redeem their loan by paying off the entire outstanding balance. In addition to the loan, you'll have to repay any costs your lender incurred in repossessing the car, including repossession costs, storage fees, and legal fees.
  • Negotiate with your lender. Sometimes you can negotiate to get back your car and reduce your outstanding debt.  This may appeal to lenders who want to avoid the costs of repossession as it may be more cost-effective to reduce a borrower's debt than to go through the process of taking back the car and selling it.

How a car repossession works

According to the Federal Trade Commission, your lender may have the right to take back your car without going to court or warning you in advance, depending on state laws.

For example, in Florida your lender has the right to seize your car as soon as you default on your loan, according to the Florida Office of the Attorney General. Once you're in default, the lender can repossess your car at any time, without prior notice.

The lender may come onto your property to reclaim the car, as long as it doesn't cause breach of the peace.

A breach of the peace can mean using force, threats of force, or moving your car from a closed garage without your permission. You can learn more about local auto repossession laws by contacting your state attorney general's office.

Trueblood says your financial obligations don't always end when your car is repossessed.

If your lender makes an insurance claim for damage you caused to the car while it was in your possession, your carrier may be responsible for repair costs.  

Trueblood says typically you are entitled to buy back your repossessed vehicle by paying the delinquent amount you owe your lender, along with any expenses your lender incurred while repossessing the vehicle, such as storage costs.

You also may attempt to buy back the repossessed vehicle by bidding on it at a repossession sale.

What if your car is sold for less than you owe your lender?

You'll have a deficiency if your auto lender repossesses your car but ends up selling it for less than the amount you still owe on your loan.

For example, if you owe $5,000 and your lender sells the repossessed car for only $3,000, there is a $2,000 deficiency. In most states, the creditor can sue you to pay that amount. Armitage says this rarely happens, however.

It’s more common for a creditor to hire a collection agency to go after your debt, he adds.

Trueblood says you typically would need to have a deficiency of $4,000 or more in order for your creditor to make a decision to take you to court.

If the car is sold for more than you owed on your loan, the lender must pay you the additional amount, less any costs the lender had to pay, Trueblood says. This  is known as the "surplus." 

If you have a deficiency of less than $1,000, your lender may decide it's not worth the time and effort it would take to sue you, but you can't count on that, Tyson says.

You should be prepared to honor the terms of the contract you signed when you borrowed money to purchase the car.

Can a repossession lead to higher insurance rates?

The nonprofit Insurance Information Institute (III) says insurance companies have found a strong link between how well people manage their money and how likely they are to make claims on insurance policies.

Having a car repossessed can result in higher insurance rates if you live in a state that allows carriers to use credit histories as factors in setting premiums, says Jim Armitage, an insurance agent in Arcadia, Calif. Each insurance company has a formula for using credit histories to set insurance scores. Each carrier bases its formula on its own claims history.

Some insurers may give more weight to repossessions than others, but all unpaid debts tend to lower your insurance score, Armitage says.  

California, Hawaii and Massachusetts are the only states that don't allow carriers to consider your credit history when setting auto insurance rates.  

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