The Effect of a Car Repossession on the Credit Score

Financing a car purchase through an auto loan almost always entails the vehicle standing as collateral for the loan. Although laws can differ between states, repossession of a car for defaulting on an auto loan is a quick procedure which leaves the car owner instantly deprived of their car, yet still responsible for repaying the loan. The lender will sell the car as quickly as possible and the amount raised will be put towards the outstanding debt. The remaining deficit debt will remain the responsibility of the now carless car owner.

A car repossession has an immediate negative bearing on a persons credit. The first missed payment itself will show on the credit report as a delinquent payment and could cause the score to drop around 50 points. A second missed payment which is usual before the loan is recorded as in default will further reduce ones score.

The default itself will cause a further negative on the credit score, and repossession is recorded on the credit reports as a matter of public record and will remain there for 7 years. After 7 years the debtor may write and request that the 3 main credit bureaus remove the note of repossession from the credit reports.

Although ones credit score will take a big hit if a car repossession occurs, the overall damage will be determined by the overall state of ones credit. If all other debts are up to date and being serviced the hit will be lower than if there is a record of other missed payments too. If an auto loan comprised the majority information on the credit report, as it will in the case of many young people, the effect on the credit score will be more damaging.

The note of repossession itself will do more damage than the reduction in credit score, as the latter can be re-established over time, whilst the note of repossession will remain. This in itself will prevent the person obtaining another car loan or other forms of credit unless sub prime lenders are used that charge excessive rates.

Anyone in imminent danger of having their car repossessed would be better placed to try and sell the vehicle quickly rather than wait for it to be repossessed. If the car is sold for less than the amount of the loan the loan will still need repaying, as it would with a deficit, but at least the note of repossession will not be entered on the credit report. However the delinquent payments will still do damage to the credit score.