When you take out an auto loan, the plan is to make your payments on time every month. But things can veer off track if you experience a financial setback and don’t have an emergency fund to fall back on. Whether it’s due to a loss of income or an unexpected bill, falling behind on your car payment puts you at risk for repossession. This is when the lender takes back the vehicle due to nonpayment, and it’s a negative credit event that can affect your ability to qualify for future financing.
How long does a repossession stay on your credit?
A vehicle repossession stays on your credit report for seven years from the date of the first missed payment that led to the default, according to Experian. That’s considered the original date of delinquency. Once the seven-year period ends, the entry ages off your credit reports automatically and no longer affects your score.
Your lender may be required to notify you before they repossess the car so that you have the chance to catch up on what you owe, but this isn’t always the case. In many states, vehicle repossession can happen without warning after you’ve missed a payment.
Read more >> How Many Payments Can You Miss Before a Car Is Repossessed?
Check your state before assuming you'll get a warning. Rules vary by state and change over time. Your state attorney general's office can tell you what applies where you live, and a local legal aid office can help if you're already behind.
How a repossession affects your credit score
Each of the three major credit bureaus (Experian, Equifax, and TransUnion) maintain a credit report in your name. Repossession is a negative entry that appears on all three credit reports. How much it affects your credit score depends on your overall credit history and how many other negative marks you have against you.
Every late payment that precedes a repossession can appear on your credit reports for seven years. Your loan contract spells out what puts you in default, and for most auto loans, a single missed payment is enough. Once the account is in default, that status is another derogatory mark on top of the late payments. These actions all work together to hurt your credit.
A repossession can make it more difficult to qualify for financing in the future because it can suggest to lenders that you’re a risky borrower. If you do get approved, you’ll likely pay a higher interest rate. A repossession can also raise what you pay for car insurance, according to the Consumer Financial Protection Bureau (CFPB), though some states limit how much insurers can weigh your credit.
Read more >> What Happens if You Miss a Car Payment?
Voluntary vs. involuntary repossession on your credit report
If you can’t afford your car payment and know that repossession is coming, you can contact your lender to make arrangements to return the car. This is called a voluntary repossession, and it might reduce how much you pay in fees. It can also protect your privacy if you’d prefer that your neighbors didn’t see your car getting repossessed from your driveway. One other benefit is that future lenders may look more favorably on a voluntary repossession.
An involuntary repossession is exactly what it sounds like. According to the CFPB, some states require lenders to do this without “breaching the peace.” That generally means they can’t make threats, use physical force, remove a car from a closed garage without your permission, or repossess a vehicle after you've resisted or refused.
There’s one other catch: if the lender sells your vehicle to recoup its losses, you might be responsible for paying the difference between your outstanding loan balance (plus repossession fees) and the final sale price.
Read more >> Does Voluntary Repossession Affect Your Credit?
If you’re weighing a voluntary repossession because you feel out of options, it’s worth talking to a professional first. The National Foundation for Credit Counseling connects people with free or low-cost credit counselors who review your situation and talk over alternatives. Reach out to NFCC at 800-388-2227.]
How to remove a repossession from your credit report
If the repossession is accurate, it will age off your credit report after seven years from your first missed payment. But you may be able to have it removed sooner if it’s there in error or your lender agrees to remove it early.
Dispute the repossession
This involves filing a dispute with each of the credit bureaus. You can do this by taking the following steps:
- Order copies of your credit reports. Get your free reports at AnnualCreditReport.com or by signing up for an account with the bureaus.
- Identify the error and gather documentation. That might be a bank statement showing that you made your car payment, an email exchange with your lender, or other evidence to support your case.
- Submit a formal dispute. Submit a dispute directly to the bureaus online, over the phone, or by mail.
If your dispute is approved, the bureau may delete it from your credit report.
Try negotiating with your lender
This isn’t a guarantee, but the lender may be willing to delete the entry on your credit reports if you settle the debt in one lump sum. This is called a pay-for-delete request. Depending on the lender and how much you owe, they may be willing to accept a reduced amount. Whatever you agree to pay, be sure to get it in writing before sending money. And make sure you can comfortably afford it.
Never pay for a delete on a verbal promise. Lenders aren't required to remove accurate information, and some refuse as a matter of policy. If one agrees, get the terms in writing first — after you pay, you have nothing to hold them to.
How to build your credit after a repossession
Losing a car is hard, and watching it land on your credit report makes it worse. But a repossession doesn't freeze your credit in place. Everything else you do after still counts:
- Pay what you can, on time. It doesn't require paying more than you're already paying, just pay on schedule. Every month you do adds to your record.
- Chip away at your credit card balances. Lowering how much of your available credit you're using can move your score within a cycle or two, so even partial progress shows up.
- Check your reports for errors. A repossession that's dated wrong or shows the wrong balance can be disputed. Pull all three reports for free at AnnualCreditReport.com.
- Leave your old accounts open. Closing them shortens your credit history and shrinks your available credit. If an account is unused, one small charge every few months keeps the issuer from closing it for you.
- Hold off on new applications. Each one adds an inquiry, and approvals will be harder for a while anyway. Let waiting be your strategy.
Read more >> The Importance of On-Time Payments in Building Credit
Bottom line
An accurately reported repossession stays on your credit reports for up to seven years from the first missed payment that led to it. Voluntary surrender may trim some of the fees, but it doesn't shorten that clock.
What you can do in the meantime is add positive payment history, which is the single largest factor in your credit score, and a strong score is what earns you a lower rate on your next auto loan. Kikoff’s Credit Account reports to all three bureaus monthly with no hard credit check.
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Disclaimer: The information provided in this blog post is meant for informational purposes only and does not constitute financial advice.
