How Does Repossession Affect Your FICO® Score?

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Falling behind on your car payments can put you in hot water with your auto lender. Unless you get caught up or agree to a modified payment plan, the lender may repossess your vehicle and sell it to recoup the full amount you owe.

Losing your access to transportation can be devastating, especially if you can't get to work or school without it. But a repossession can also have consequences for your credit history, making it more difficult to get financing for a car or other large purchases in the future.

What Happens When a Car Is Repossessed?

When you get an auto loan to buy a car, the lender technically owns it and retains the title until you've paid off the debt in full.

Auto loan agreements stipulate that the lender has the right to seize the vehicle in the event that you default. The timeline can vary from lender to lender, but it's generally longer than 60 days, and your contract should state what constitutes a default.

Once the lender has decided to repossess the vehicle, they must abide by state laws, which may require that the lender notify you first. Many states also prohibit lenders from damaging any property, using physical force, or "breaching the peace" in the process.

Once the lender has the vehicle in its possession, it'll typically sell it at auction to get its money back. If the vehicle sells for less than what you owe, you may have to pay the remaining deficiency balance. In contrast, if the lender gets more for the vehicle than the amount that you owe plus its expenses, they may be required to pay you the surplus amount.

How Does a Repossession Hurt Your Credit?

There are a few different ways a repossession can damage your FICO® Scores, particularly if you have a deficiency balance:

Late payments: Before your loan even enters default, your late payments can hurt your FICO® Scores significantly. This is because your payment history is the most influential factor in your FICO Scores.
Default: In addition to your late payments, a loan default will be added to your credit reports as a separate event.
Repossession: Along with the default, the lender will report that it has repossessed the collateral you used to secure your auto loan.
Collection account: If you have a deficiency balance and can't pay it, the lender may sell your debt to a collection agency, which typically reports a collection account that's separate from the original loan.

In all cases, these items will remain on your credit reports for seven years from the date of your first missed payment.

That said, it's difficult to say exactly how much any individual item will decrease your FICO® Scores. Credit scoring models are complex, and there are many different variables that can help or hurt your score. And because each person has their own set of variables, the damage done to your FICO Scores may be different than to someone else.

How to Avoid a Repossession and Its Impact on Your FICO® Score

If your FICO Scores have already taken damage due to missed payments, there are some steps you can take to avoid the extra harm that may occur from repossession and collections:

Sell the car: Selling the car and paying off the loan could be an easy way to get your lender off your back. Of course, this might not work if you need a vehicle to get around unless you have enough equity to buy another vehicle outright or with a smaller, more affordable loan.
Refinance the loan: This option may be difficult if you've already missed some payments, as prospective refinance lenders may decide to pass. Also, refinancing will only delay the inevitable unless you can find a way to make your monthly payments. But if your credit is still in good enough shape or you have a co-signer who can help you qualify for favorable terms, refinancing can solve your immediate problem.
Get on a modified payment plan: The repossession process isn't cheap, so many auto lenders are open to working with borrowers who can afford to make payments on a modified plan. Reach out to your lender to learn about your options.
Surrender the vehicle: If you don't have any other options, surrendering the car voluntarily may reduce the damage to your FICO® Scores even if only a little. It may also save you some money on fees.

Your FICO® Scores After Repossession

If you've already experienced a repossession, the recovery process for your credit history can take time. However, not all is lost. While these negative items will remain on your credit reports for seven years, adding new positive information to your credit reports can help counteract the negative information.

For starters, if you have other debts, make sure you pay them on time, and if you have a deficiency balance on your auto loan after the repossession, pay it as quickly as possible.

Also, look for other ways to build credit, such as paying down credit card debt, disputing inaccurate or fraudulent credit report information, avoiding unnecessary debt and more.

As you work to improve your FICO® Scores, you'll have an easier time laying a solid foundation for your financial future.

Ben Luthi

Ben Luthi has been writing about money and travel for seven years. He specializes in consumer credit and has written for several major publications and industry leaders, including U.S. News and World Report, Fox Business, Wirecutter, Experian, and Credit Karma.