If Your Car Gets Repossessed, What Happens to Your Credit?

When a car loan goes unpaid, it can lead to repossession, a serious financial event where the lender takes back the vehicle that served as collateral for the loan. This process occurs when a borrower defaults on the loan agreement, typically after missing several payments. The implications of repossession extend far beyond losing transportation, as it significantly impacts an individual’s financial standing and creditworthiness.

How Repossession Affects Your Credit Score

A car repossession damages a consumer’s credit score because it indicates a default in payment obligations. Credit scoring models, such as FICO and VantageScore, heavily weigh payment history as the most influential factor. A repossession signals a failure to meet loan terms, which is a major negative mark on this component of the score.

The initial missed payments leading up to repossession already begin to lower a credit score, with each subsequent missed payment causing further declines. When the repossession occurs, it leads to a significant drop in credit scores. The exact magnitude of the score drop varies depending on the consumer’s credit health prior to the repossession, including their existing credit history, amounts owed on other accounts, and the presence of other derogatory marks. Individuals with otherwise strong credit profiles may experience a more pronounced initial decrease.

Credit Report Entries Associated with Repossession

A car repossession results in multiple negative entries on a consumer’s credit report. The repossession event itself is recorded on the credit report, typically appearing under the auto loan tradeline. This entry indicates that the vehicle was repossessed by the lender due to non-payment.

Beyond the repossession, the lender may report a “charge-off” if they deem the debt uncollectible. A charge-off signifies that the creditor has written off the debt as a loss, usually after 120 to 180 days of missed payments. Although charged off, the debt is not forgiven, and the consumer remains legally obligated to pay it.

If a deficiency balance arises after the sale of the repossessed vehicle and is not paid, the original lender may sell this debt to a third-party collection agency. This leads to a new “collection account” entry on the credit report, serving as an additional derogatory mark.

The Deficiency Balance and Its Credit Ramifications

A “deficiency balance” is a potential outcome of car repossession. This balance occurs when the amount the repossessed vehicle sells for, typically at auction, is less than the outstanding loan balance plus any related fees, such as towing, storage, and sale preparation costs. For example, if a borrower owes $15,000 on a car loan and the repossessed vehicle sells for $6,000, the deficiency balance would be $9,000, in addition to any added fees.

If this deficiency balance remains unpaid, it creates further credit ramifications. The original lender may report the deficiency as a charge-off on the consumer’s credit report. Subsequently, the lender may sell this unpaid deficiency to a collection agency, resulting in a collection account. In some instances, if collection efforts are unsuccessful, the lender or collection agency might pursue legal action, potentially leading to a judgment against the consumer, which would also appear on the credit report and further harm credit.

Understanding the Timeline of Credit Impact and Monitoring

The negative impact of a car repossession, along with associated entries like charge-offs and collection accounts, remains on a consumer’s credit report for up to seven years from the date of the original delinquency, which is the first missed payment that led to the repossession. Similarly, charge-offs and collection accounts typically remain on the credit report for seven years from the original delinquency date of the debt. Even if a charged-off or collection account is paid, it generally remains on the credit report, though its status may change to “paid.”

Monitoring one’s credit report is important after a repossession to track these entries and identify inaccuracies. Consumers can obtain a free copy of their credit report from each of the three major credit bureaus—Equifax, Experian, and TransUnion—once every 12 months through AnnualCreditReport.com. Various credit monitoring services are also available to track changes to credit reports and alert consumers to new activity.