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Many people these days buy their cars using auto financing. But if you end up in the unfortunate position of not making your car payments, you could lose your vehicle to repossession. You generally want to avoid repossession and not just because it leaves you without a ride. It can also have a very negative impact on your credit score, which can affect your life in all sorts of other ways. 

What is repossession and why does it happen?

A car repossession occurring by strapping straps to the tires.
Car repossession | Getty Images

When you buy a new or used car using auto financing, you don’t technically hold the title to the car outright until you finish paying the loan off. Until that happens, the loan company is the car titleholder. 

As Credit Karma explains, if you miss payments on your car loan, the lender has the right to retake possession of the vehicle. That’s what’s known as repossession. Specific details such as whether you would need to be notified before repossession or how many payments you can miss until it occurs will vary by state law and the specifics of your loan contract. Nevertheless, you should be aware that repossession is always possible if you fall behind on your payments. 

The consequences of repossession for your credit score and life can be severe

Credit scores are primarily based on how consistently we keep up with our loan payments. For that reason, it’s not surprising that a car repossession can have a very negative impact on your credit score. And the negative impact can last a long time: seven years from the time the loan stopped being paid. 

Experian explains all the different ways in which a visit from the repo man can drag down your credit score. Your score can get knocked into several categories, including late payments, defaults, collections, and court judgments. 

Once a repossession is on your record, you’re likely to find yourself trapped in a vicious cycle. With a lower credit score, it can be harder to find another car loan at an affordable rate, which is why car dealers love bad credit. And a less affordable rate means that you’re more likely to default on the following loan as well. 

How to avoid repossession and rebuild your credit if it occurs

Experian also lays out what you should do if you’re struggling with your car payments to try to avoid repossession. First and foremost is the importance of communication. If you find yourself in a situation where you’re afraid you’ll be behind on your payments, let your lender know and see whether some arrangement can be worked out.

If your lender is unwilling to modify your payment schedule, you may want to look into selling your car. Doing so could allow you to pay off your loan and then shop for a less expensive vehicle.

In the unfortunate event that you end up with a repossession on your credit report, you’ll need to do what you can to raise your credit score. This includes keeping a close eye on your report to correct any errors and making your other bill payments on time. Regular payments on a replacement vehicle would certainly raise your score.

In addition, getting someone with reliable bill payment habits to add you as an authorized user on their credit card can also give you a score boost for their regular payments, even if they don’t give you the credit card number. 

Of course, you won’t need to worry about pursuing any of these tactics if you can avoid repossession in the first place. Doing whatever you can to budget within your means will save you years of stress and bad credit if you can keep the repo man at bay. 


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