How Does a Repossession Affect Your Credit?

What Is an Auto Repossession?

Your auto lender holds title on your car and can take possession of it if you fail to make monthly payments and default on the loan. Your loan contract spells out exactly when a repossession can be initiated, but most banks and credit unions wait 60 to 90 days after your last payment was due.

Different states have different laws regarding repossession. Check with your state attorney general's office to learn about laws in your area. Many states require lenders to notify you in advance if your vehicle is about to be repossessed. And many don't allow lenders to "breach the peace" when taking your vehicle: They can't damage property or use physical force. You are also entitled to any personal property left in the vehicle.

The lender has a right to keep or sell your car, but typically they'll sell it and apply money from the sale to your outstanding loan balance. If the proceeds don't cover your debt and the cost of towing, storage and any other fees or expenses that have accrued, you will owe the difference—known as a deficiency balance.

Learn more: What Happens if You Don't Pay a Deficiency Balance?

Types of Repossession

Repossessions may be involuntary or voluntary, depending on how your vehicle is turned over to the lender.

• Involuntary repossession: In an involuntary repossession, the lender may seize your car at any time. Your car may be towed overnight or while parked at work. Some states allow lenders to install kill switches that remotely prevent your car from starting, making it easier to take. Related expenses such as towing fees, storage costs, presale preparation and legal fees are typically your responsibility.
• Voluntary repossession: In a voluntary surrender, you turn your car over to the lender instead of waiting for it to be taken. Although you still lose possession of your vehicle, a voluntary surrender saves you the aggravation of having your vehicle seized unexpectedly, and potential lenders may look more favorably on it in the future. You may also avoid towing fees and similar costs associated with an involuntary repossession.

What Happens to Your Credit Score After a Repossession?

Your credit score will drop after your car is repossessed. A repossession is considered a serious event. It appears as negative information on your credit reports.

How Much Does a Repossession Hurt Your Credit?

A repossession will have a serious impact on your credit score for as long as it appears on your credit report. To make matters worse, you may also experience the following "dings" to your credit when your car is repossessed:

• Late payments: For every month you miss a payment, there's a negative item on your report.
• Defaults: Entering loan default is its own negative event.
• Charge-offs: When a lender decides to write your debt off as a loss, the charge-off appears as more derogatory information on your credit report.
• Collections: If you are unable to pay off a deficiency balance, your account may be sent to collections, which will also be noted on your credit report and hurt your credit score.
• Court judgments: Unsuccessful collections may result in a lawsuit and judgment from the court.

Credit scoring is complex, so it's impossible to pinpoint exactly how many points your credit score will drop following a repossession. But, given the potential for multiple hits to your credit and the fact that payment history is the single most influential factor in calculating your credit score—accounting for 35% of your FICO^® Score^Θ—the impact is substantial.

How Long Does a Repossession Stay on Your Credit Report?

A repossession stays on your credit reportfor seven years, starting on the date of your first missed payment. Additionally, each of the items listed above (late payments, defaults, collections and so on) will also appear on your credit report for seven years, although the impact of these negative items lessens over time.

Tip: Damage to your credit can make it more difficult for you to secure loans and credit going forward. You may be able to get a car loan after a repossession, but expect to have a harder time finding a lender and a favorable interest rate.

How to Avoid Vehicle Repossession

Avoiding repossession may be possible if you negotiate with your lender, refinance, sell your car or do a voluntary surrender. Here are alternatives to explore:

• Ask to defer a payment (or two). If you're having trouble making payments, contact your lender as soon as possible. You may be able to negotiate a deferment, which allows you to skip one or more payments without triggering a default or repossession. You'll still be on the hook for the money, but you get a brief reprieve: The payments, including interest, are added on to the end of your loan.
• Work out a payment plan. If your credit is still good and you can demonstrate the ability to make future payments, you may be able to negotiate a modified payment plan for the remainder of your loan. Any change to your original loan agreement should be documented in writing.
• Refinance your loan. While your credit is good, you also may be able to refinance your loan balance with another lender. Lower interest rates or a longer repayment term could help make the remainder of your loan more manageable.
• Sell your car. If you can't afford your car payments, you may want to sell your car preemptively and use the proceeds to pay off your loan. You may get more from selling your car than the lender would if they sold it at auction. You'll also avoid the stress and credit damage that comes from having your car seized.
• Consider a voluntary surrender. A voluntary surrender still shows up on your credit report, with nearly the negative impact of an involuntary repossession. However, its impact on your credit may be slightly less dire. You'll also avoid the emotional trauma of having your car seized, and may save yourself a few dollars on fees such as towing.

Learn more: What to Do if You Can't Afford Your Car Payment

How to Rebuild Your Credit After Repossession

Rebuilding your credit after repossession involves many of the same steps as building good credit in the first place. Make sure you pay off any balance left on your auto loan after repossession. Follow these basic steps for rebuilding your credit:

• Check your credit reports. Review your credit reports at all three credit reporting agencies (Experian, TransUnion and Equifax) to make sure all of the information that appears on your credit reports is correct, including accounts, personal information and credit inquiries. You can view your credit reports from all three agencies at AnnualCreditReport.com. Although inaccuracies are rare, you have the right to file a dispute with the agency reporting an error if you find one.
• Pay off your debts. If your repossession includes a deficiency balance, try to repay it before it goes to collections. Bring any past-due accounts you have current, then aim to reduce your credit utilization by paying down revolving credit card balances. In general, your credit card balances should not exceed 30% of your total credit lines, but the lower your credit utilization, the better.
• Make consistent on-time payments. Paying your loan and credit card bills on time, every time, improves your payment history, which is the most influential factor in determining your credit score. The trick is to keep up your on-time payments, month after month. Even a single 30-day late payment can lower your credit score.
• Monitor your credit. Keep track of your progress by checking your credit reports and scores regularly. If you use free credit monitoring from Experian, you'll get suggestions on what to do to improve your credit score and receive alerts whenever changes to your credit file occur.
• Add on-time payments with Experian Boost^®ø. Experian Boost is a free feature of an Experian account that adds eligible on-time utility, phone, insurance, streaming service and rent payments to your Experian credit report, which may improve your credit scores based on Experian data.
• Consider credit counseling. A nonprofit credit counseling agency can help you develop a budget and implement a debt payoff strategy. Some credit counseling services offer debt management plans that can reduce your interest rates and simplify monthly payments.

Learn more: How to Repair Your Credit

How Long Does It Take to Rebuild Your Credit After Repossession?

Many variables can affect how long it takes to rebuild your credit after a repossession. Though there's no standard timeline, these three principles generally hold true:

• Rebuilding your credit can start immediately. Your credit score typically begins to improve when you start paying off debt, bringing accounts current, making on-time payments and limiting the amount of new debt you take on. Progress may be incremental, but it is progress.
• Consistency counts. Continuing good credit practices over time is key, especially after a serious event like a repossession. It may take months or years to fully build back (or build up) your good credit.
• Repossession continues to affect your credit for years. Negative items like repossessions, late payments and defaults remain on your credit report for seven years, though their effect on your credit score diminishes over time.

The Bottom Line

Your repossession and any late payments and collections that went with it will be automatically deleted from your credit report after seven years. At that point, lenders will no longer see the repossession when they check your credit report and it will have no effect on your credit score. Monitoring your credit report and FICO^® Score for free regularly can help you stay up to date throughout the process of experiencing a repossession—and recovering from it.