Over the past few years, the rate of auto repossessions has increased as the auto loan market has undergone its own subprime lending crisis, similar to the one that crippled the U.S. mortgage industry.
As with mortgages, auto lenders frequently provided large loans to people with lower credit scores. In turn, American consumers, who became accustomed to borrowing rather than saving, purchased as much car as possible for a low monthly payment. That practice meant that loan repayment terms often extended to 60 months and beyond. For example, among borrowers with good credit, 41 percent of auto loans were longer than 60 months in 2007, up from 12 percent in 2002. Among subprime borrowers (people who paid higher interest rates because of poor credit), 67 percent of loans were for more than 60 months in 2007.
Many vehicle loan contracts specify that if a borrower stops paying the loan, the lender can repossess, or take back, the vehicle. Lenders typically repossess cars once owners are behind on payments by about 90 days. After a vehicle is repossessed, the car will be sold at auction, typically within 41 days.
The repossession has serious costs for the vehicle owner:
The owner must pay the difference between the amount left on the loan and the profit brought in from the sale, minus costs for cleaning, repossession, transport and the sale. This amount is known as the deficiency. Some owners are stuck paying for years after they lose the vehicle.
A repossession severely damages the credit score. One of the largest credit reporting agencies, Experian, reports that an auto repossession will remain on a credit report for seven years from the original delinquency date, or the date you missed your first payment.
Even one late auto loan payment can knock a credit score down by as much as 100 points. As a result, buying a replacement vehicle costs more, with a higher interest rate on a vehicle loan.
What to do if you face repossession
1.Cut costs where you can
In many places, a vehicle is essential to take people to work or school. If this is the case for you, take a hard look at your budget to see if you can cut out expenses, which may range from eating out to entertainment to cigarettes, to free up more money to stay current with car payments.
2.Remove personal items from the vehicle
If you are late on payments, do not keep any personal items in the vehicle in case it is repossessed.
3.Know your rights
You can learn about local laws from the office of your state's attorneys general. For example, in every state, you have the right to try to redeem your vehicle, even after it has been repossessed, by paying all late payments and related costs. Service members on active military duty who bought the car before they went on active duty cannot have a vehicle repossessed without a court order.
4.Communicate with the lender
If you are late on a payment, or worried you cannot pay, contact the lender and explain the situation. Get all promises from the lender in writing. At worst, you can voluntarily surrender the vehicle. This "voluntary repossession" still damages credit, but it will save you the repossession costs of about $700.
5.Sell the vehicle
If you owe less than the vehicle is worth, consider selling it to pay off the loan, then purchasing a vehicle that is within your means.
If you need help in managing your other debts (such as credit card debt) to help reduce your overall debt burden -- and possibly help prevent vehicle repossession -- seek out a reputable debt settlement company. An experienced advisor can help you manage your financial problems and make debt repayment affordable.
Having a vehicle repossessed is second only to a mortgage foreclosure in the damage it can do to your credit and your lifestyle. Before you get into financial trouble with a car, try to remedy the situation -- but if you do face repossession, know how to minimize the damage.
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC and its wholly owned subsidiary, Freedom Debt Relief, a national consumer debt resolution firm that has served more than 40,000 clients and manages more than $1 billion in consumer debt. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.