About Repossession of Cars

By Peggy Deland
About Repossession of Cars
Creative Commons photo by ""diaper"" on flickr.com

Approximately 1.5 million vehicles are repossessed each year by creditors when the car's owner defaults on the loan. Put simply, vehicle repossession is when a creditor takes a car back because they believe that you will not fulfill your obligation to pay your remaining debt. The loan must be in default to take the car, but the definition of "default" varies greatly depending on the wording of the contract and the state the sale was made in.

The Facts

Creditors have legal authorization to repossess a car the moment the owner is considered to be in default. In some cases, being only a day late on the payment may constitute defaulting on the loan. In general, the creditor can come onto your property to take the car without notifying you in advance, but cannot "breach the peace." This means that they cannot use force or threaten to use force, and in most states, they cannot take a car from a closed garage.

Misconceptions

When faced with a car loan that exceeds the value of the vehicle, it may seem like a good idea to allow a voluntary repossession--essentially, returning the car to the creditor. However, the loan is not discharged when the car is taken. Instead, the car is auctioned off, often for far less than its actual worth, and you still owe the difference between what the car sold for and the amount you owed on the car. You are left with a substantial amount of debt and no longer have the vehicle.

Risk Factors

There are several factors that make future repossession of a car more likely. Most of these can be controlled, but only before the car is actually purchased. Long-term auto loans and loans made without a down payment are defaulted on more frequently. Often, this happens because the buyer could not really afford the car they chose to buy. Other issues that may lead to a car being repossessed include a high car payment, lack of emergency or buffer savings and purchasing an unreliable car that may need major repairs before the loan is paid off.

Effects

Having your car repossessed can cause serious damage to your credit rating. Repossessions are listed on your credit report for seven years from the time the loan became delinquent, even if you pay off the remainder of the loan. It can be very difficult to get loans, including another auto loan, if there is a repossession in your credit history. Even if you are able to get a loan, it will most likely have a very high interest rate. In some states, if the remainder of the debt is not paid off, your wages may be garnished.

Function

Auto loans are secured loans, much like mortgages. This means that the car does not truly belong to you until it is paid off. Instead, the contract states that it will become yours once you have paid the outstanding debt. Car repossessions exist to prevent people from getting auto loans, refusing to pay and keeping the car. They also act as a sort of insurance against the loan not being paid off. Although the proceeds from the auction of the repossessed car are rarely enough to cover the entire amount owed, the creditor receives some reimbursement for the remaining debt.

About the Author

Peggy Deland has been a writer and editor since 2007. Her articles appear on a variety of websites, including Life Unplugged and ConsumerSearch. Deland specializes in topics such as health, aviculture, science, green living and travel.