Car Repossession - How Does Car Repo Work?

Kelly Boyer Sagert

Updated November 9, 2021

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A car repossession — or “repo” — is when a lender seizes your vehicle to get back some of the money it loaned to you. In some cases, it can happen after missing just one car payment. If your car gets repossessed, you not only lose your vehicle, but you can also get hit with high fees. Plus, your credit score will likely take a hit.Read on to find out exactly what can trigger a car repo, what happens when your car gets repossessed, and what you can do to avoid the problem.

What Is Car Repo?

When you lease a car or take out a loan to buy a car, your lender will typically use your new vehicle as collateral to secure the loan. That means if you miss payments and default on the loan, your lender or leasing company can hire a recovery company to repossess the car (take the vehicle away). Once the car is repossessed, you no longer have a claim on the vehicle. The lender will usually sell the vehicle at auction in order to recover some of the money it loaned you.

How Does Car Repo Work?

Your loan contract will specify terms for repossession, defining what it means to default on your loan and laying out the consequences. In some cases, defaulting may mean missing just one payment. More often, it means a series of late or missing payments. Lenders will often warn you that you’ve missed a payment and try to collect before repossessing your car. If the lender fails to collect and you’re in default, it can come and take your vehicle at any time. They may send repossession agents to physically take your car away. If your car is equipped with a starter interrupt device (SID), however, a lender can disable your car via remote control so that you are not able to drive it until you clear up the problem.

When Can a Car Be Repossessed?

In many states, your car can be repossessed by your lender as soon as you default on the loan or lease, according to the Federal Trade Commission. How “default” is defined will be spelled out in your contract, but typically it means not making a payment on time.Some states have laws that require lenders to send you a notice before repossession, alerting you to what payments have been missed and also giving you a time frame during which you can make up payments to prevent a car repo.

Vehicle Repossession Laws

Once the loan or lease is considered to be in default, the lender can typically take the car without notice, even coming onto your property to repossess it. What they can’t do, however, is “breach the peace.” Depending on which state you live in, this could mean that they aren’t allowed to use — or even threaten to use — physical violence to get a vehicle. In some cases it means that they can’t take your vehicle out of a closed garage without permission. To learn more about the car repo laws in your state, you can consult your State Attorney General or local consumer protection agency.While the car does not technically belong to you and is the property of the lender or leasing company, you do have some basic rights if your car is repossessed. These include:

Your Personal Property

If you have any items of value in the car, such as a laptop or car seat, the bank or leasing company that owns the loan is not allowed to keep or sell the property found inside the car.In some states, a creditor must tell you what items were found in the car and how you can get them back.If you’re having trouble retrieving personal items that are of significant value, you might want to file a consumer complaint or talk to an attorney about how to get your belongings back or if you can be compensated for them.

Selling Price

The lender might sell the repossessed vehicle directly to the public to quickly get their money back from the loan. Or they might sell it at a vehicle auction.The lender doesn’t have to sell it for the highest possible price, but they are legally required to make an effort to get fair market value for the car and to sell it for a “commercially reasonable” price.The reason is that the sales proceeds will go toward paying off your debt. It would be unfair to repossess a vehicle and then give it away for very little to somebody else.

Can Filing For Bankruptcy Protect You From Car Repo?

During a Chapter 7 bankruptcy, the lender is often prohibited from repossession of cars. However, the lender may ask for an exception (a “motion for relief”) and the court might grant that to them if payments aren’t being made on time. With a Chapter 13 bankruptcy, car loans are considered a secured debt and the loan balance might be reduced if you owe more than what the vehicle is currently worth. If you qualify for a repayment plan under this type of bankruptcy and can catch up payments, you can sometimes keep the car.That said, filing for bankruptcy is a big decision to make and, if you do, this can also negatively impact your credit. If can also be difficult to get a loan after bankruptcy,

Impact of Car Repossession on Credit Score

A repossession is a red flag on your credit report and can have a serious impact on your scores, according to Experian. Plus, a repossession can stay on your credit report for seven years, beginning with the date of your first late payment.In addition to the repossession being listed in your credit report, failing to pay your auto loan on time may trigger other negative marks in your credit. For each month you are 30 days or more past due, the lender can report the account as delinquent. If the lender sends the account to a collection agency, that information may also appear in the credit report.

How Much Does Car Repo Cost?

After a car gets repossessed, the lender will likely sell it and, if they don’t get their money back in full, then they might sue you for what’s called a deficiency judgement.Let’s say that you owed $18,000 on a vehicle but, when the lender sells it, they get $12,000. That’s a deficiency of $6,000 and, in most states, they can sue you for that difference, assuming that they followed the rules throughout the process. You may also be charged other fees you owe under the contract — like fees related to the repossession, early termination of your lease, or early payoff of your financing. In some states, you may be able to get your car back before it goes to auction by reinstating or redeeming your car loan contract. If you reinstate your loan, you will likely need to pay all your past due payments, plus interest and penalties, as well as any repo and storage costs. If you redeem your loan contract, you typically will need to pay off the entire loan, plus any repo costs.

How to Avoid Auto Repossession

Preventing a vehicle repossession from happening can often be easier than trying to fix the problem once the car has been taken away. Here are some ways you may be able to reduce the risk of repossession if you’re struggling with car payments.

Communicating With Your Lender

If you’ve fallen behind in payments and worry that you could have your vehicle repossessed, or you know that you won’t be able to make your next payment, it can help to proactively contact the lender or creditor to talk about options. The financial institution may help you to solve the problem, perhaps by agreeing to defer loan payments for a certain amount of time or otherwise help you to keep your vehicle. If you and the lender are able to come to an agreement about amending or skipping payments, it can be a good idea to get the new terms put down in writing to avoid any problems down the line.

Refinancing Your Car Loan

If your payments are too high, refinancing your current auto loan with a new car loan that has a better interest rate or more favorable terms and conditions is another route to consider. This solution can be more feasible if you reach out to lenders to refinance before your credit has been negatively affected. Refinancing could help you avoid repossession by satisfying what you owe on your existing loan and starting fresh with a new lender.

Pros & Cons of Refinancing a Car

Refinancing your car to avoid car repo has both advantages and disadvantages. Here are some pros and cons of refinancing your car:Pros

Potential for a lower interest rate
Potential for lower monthly payments
Different loan terms

Cons

Possible prepayment penalty when you use the new loan to pay off your old loan (refinancing with the same lender may be a way to avoid or minimize this fee)
Fees involved in refinancing a car
Temporary credit score dip

Voluntary Repossession

If you know that a vehicle repossession is coming and you don’t have a way to pay what you owe, you could voluntarily give the car back to the lender. This can be a less stressful situation than waiting for the car to be taken away and may slightly reduce the impact on your credit report.

Paying Off the Loan

This may not be possible, financially speaking. But, if it is, it could be the simplest solution, one that can allow you to keep your vehicle and help to protect your credit. Perhaps you could sit down with a family member or close friend and provide them with a feasible plan to become more financially stable and ask them for a short-term loan if that’s needed to save your car and credit.

The Takeaway

Car repossession can take place when a borrower can’t meet the agreed-upon loan or lease payments. It can be wise to try and avoid a vehicle repossession because of hassle, extra expenses, and the credit problems that typically result from it.Depending on your loan or lease contract, you may have time to make the missing payments and retrieve your car before it is sold at auction.If you’re struggling to make your monthly car payments, one way to avoid car repossession is to refinance your auto loan to help make your payments easier. Interested in checking out your options? Lantern by SoFi can help. Fill out one simple form to get offers from multiple lenders in our network.

Photo credit: iStock/gremlinDisclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC1021224

About the Author

Kelly Boyer Sagert

Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. As she was getting her writing career off the ground, she spent several years working at a savings and loan institution, working in the following departments: savings, loans, IRAs, and auditing. She has published thousands of pieces online and in print.

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