Repossession occurs when a lender takes ownership of your collateral asset in response to the borrower’s failure to make payments described in the loan agreement.
What Does Repossession Mean?
When you finance a large purchase, like a car, for example, you need to be sure that you are making or setting aside enough money to pay for the vehicle or item. Should you begin to fall behind in repayments, you might get a warning or two from your lender. Eventually, they may take your vehicle or collateral away to recover their money. This is the process of repossession.
A repossession can occur without a court order. Although it is a legal matter, your lender can report to the bank that you cannot pay your debts, and then your large purchase can be taken away—in the case of a car, towed away. In addition to a repossession leaving you without your large valuable piece of property, you now have a negatively impacted dent in your credit that will remain there for years. Eventually, this can lead to more significant difficulties applying for future financing like credit cards or mortgages.
What Does Repossession Have To Do With My Credit?
When your asset gets repossessed, this action will likely remain on your credit report for years to come. The average time is between 5–7 years in total.
There are a few things to remember when it comes to your credit.These include things like late payments on your loans, collections (when your deficiency report is sent to an account collections department), and entering into loan default. When your property is repossessed, you will most certainly see a drop in your overall credit score.
Types of Repossessions
When it comes to understanding repossessions, why they happen, and what exactly they impact, it’s essential to be aware of two primary types of repossession. These types are voluntary and involuntary.
There are situations in which a borrower may see a repossession is on the horizon. They’ve been monitoring their own delayed payment pace, or they’re seeing gaps in their ability to pay on time. Either way, they’re aware, and in a voluntary repossession situation, they will essentially give their asset back to the lender. This kind of submission is rare, and you will likely hear of repossession in the other manner: involuntary repossession.
Involuntary repossession is when the lender takes the asset back as soon as it’s realized the borrower cannot pay in the agreed-upon, contractual manner. Many times, the lender is forced to take the piece of property without direct permission. Essentially, this means the bank permitted them; when your property status goes into “repossession,” you no longer own your asset. In short, if you’re short on your car payments and the lender notices, don’t be surprised to see a tow truck in your driveway.
Best Ways To Avoid Repossession and How You Can Recover Your Assets
You can most definitely avoid repossession. It would help if you did everything in your power to avoid it at all costs—by always paying your bills on time. A few options you have to consider when trying to avoid repossession are going to your lender directly and discussing how much you still need to pay if you’re behind, how much behind, and what you need to do to bring yourself up to speed.
Another thing you can do in this discussion is to see if your lender is open to refinancing into another agreement that allows your payments to be more affordable every month. Keep in mind that your lender wants to keep a good relationship with you and be paid on time.
As difficult as it may sound, there are ways to recover from repossession. Before you get into the headspace of preparing for recovery, it’s vital to understand that your credit has been significantly impacted. To rebuild your score, you can start by paying off any outstanding balances you may have on your existing loan. This is where you can work with a debt counselor to create a plan. The next step is to keep up with other loans and payments. All of your loans are linked to the same overall credit score.
Another way to continue rebuilding is to keep a low balance on your credit cards and pay them off as you use them. This also involves heavy budgeting and control over your spending. Lastly, continue to meet all of your payments from credit cards to rent, utilities, and other necessary bills.