What Happens If I Let My Car Go Back?

When individuals cannot make payments on a financed vehicle, they may allow the car to “go back” to the lender. This is vehicle repossession, which can be voluntary or involuntary. The car, serving as collateral, is reclaimed by the lender.

The Repossession Process

Vehicle repossession can occur in two ways: voluntary surrender or involuntary repossession. Voluntary surrender happens when a borrower contacts their lender to arrange the vehicle’s return. This offers some control over timing and location, but it is still a repossession.

Involuntary repossession involves the lender seizing the vehicle without the borrower’s cooperation. Lenders use specialized agents for this, which can happen anywhere, anytime. No prior notice is legally required before seizure. Agents cannot “breach the peace” by using force or threats, or entering a locked garage without permission.

After repossession, the lender sends the borrower a notice. This notice details the right to redeem the vehicle and the lender’s intent to sell it. It specifies the sale date and time, whether public or private.

Financial Responsibilities After Repossession

After a vehicle is repossessed, the lender’s primary goal is to recover the outstanding loan balance. This is achieved by selling the repossessed vehicle through a public auction or a private sale. Lenders are required to conduct this sale in a “commercially reasonable manner,” meaning they must make a good faith effort to obtain a fair market value for the vehicle. However, the sale price at auction often does not cover the full amount owed on the loan.

The difference between the outstanding loan balance, including any accumulated interest, repossession costs, and sale expenses, and the amount the vehicle sells for is known as a deficiency balance. For instance, if a borrower owes $15,000 on a car, and the car sells for $10,000 after $1,000 in repossession and sale fees are added, the deficiency balance would be $6,000. This deficiency balance remains the responsibility of the borrower, even though they no longer have the vehicle.

Should the borrower fail to pay the deficiency balance, the lender may pursue legal action to collect the debt. This could involve the lender filing a lawsuit to obtain a judgment against the borrower, which could then lead to wage garnishment, bank account levies, or liens on other property, depending on state laws. In rare instances, if the vehicle sells for more than the outstanding loan balance plus all associated costs, a surplus may occur. In such cases, the lender is required to return the surplus funds to the borrower.

Credit Score Implications

Vehicle repossession, voluntary or involuntary, negatively impacts an individual’s credit report and score. It is reported to Experian, Equifax, and TransUnion, including the repossession and any missed payments. Unpaid deficiency balances may result in a charge-off, further damaging the credit profile.

A repossession indicates high risk to potential lenders. This can drop credit scores, making it challenging to obtain future credit like auto loans, mortgages, or credit cards. Extended credit will likely have less favorable terms, including higher interest rates, due to increased risk.

A repossession remains on a credit report for up to seven years from the original delinquency date. While its impact lessens over time, it can hinder financial opportunities. Communicating with lenders and addressing deficiency balances can help mitigate long-term credit damage.

Handling Personal Belongings and Future Actions

After repossession, borrowers often have personal belongings left inside. Lenders must allow retrieval. The repossession agent or lender will provide collection information and a deadline. Act quickly, as unclaimed property may be disposed of.

Maintaining communication with the lender is important, especially regarding any deficiency balance. Discussing payment arrangements for the remaining debt can lead to more manageable solutions than ignoring the obligation. Lenders may negotiate a payment plan, preventing further collection actions or lawsuits.

Understanding one’s rights after a repossession is important. Resources like consumer credit counseling services or legal aid organizations can guide navigating the financial aftermath and understanding consumer protection laws. These organizations can help assess the situation, explain options, and advise on addressing the deficiency balance and rebuilding financial stability.