What Happens if My Car Is Repossessed?

If your auto loan payment has started to feel overwhelming, there’s usually a real reason behind it. Maybe the monthly payment is more than your budget can handle. Maybe other debts have started elbowing their way in. 

Either way, falling behind on your auto loan could put your vehicle at risk of repossession, which makes finding a workable solution sooner rather than later especially important. Auto loans are a type of secured debt, so when you sign, your lender places a lien on your vehicle. If you don't repay your loan, your lender has the legal right to repossess the car. 

Losing your car to repossession could put you in a tough spot. Many people rely on their vehicle to get to work, or just to get basic necessities. But the consequences of having a car repossessed could go well beyond the loss of your vehicle. 

Here's what happens if your car is repossessed—and how to head that off.

You Still Owe Money on Your Car Loan 

You might assume that if your car is repossessed, it wipes out your remaining auto loan balance. Not true. 

When a lender sells a repossessed vehicle, the sale price is generally applied to your outstanding loan balance. However, it's not a given that your car will sell for a high enough price to cover the amount you owe—especially when you account for all the fees that come from repossession.

If the sale doesn't cover your remaining loan balance in full, you'll be legally responsible for paying any remaining balance. If you don't pay, that debt could be sent to collections. After enough time, you could even wind up dealing with a debt lawsuit.

Car Repossession and Your Credit

Having a car repossessed could have a serious and long-lasting impact on your credit score. A car repossession is typically included on your credit report, and it can stay there for up to seven years. 

That said, a single late payment generally won’t result in your car being repossessed. Usually, lenders don't start the process to repossess a car until you're 90 days late and have missed multiple payments. By the time a car repossession appears on your credit report, you'll probably have several late payments on there as well. 

How to Avoid Having Your Car Repossessed

Repossession is stressful and expensive, so it's best to avoid it if possible. Try these strategies if your auto loan has become too expensive.

Communicate with your lender

If you're experiencing a temporary financial hardship and are struggling to make your auto loan payments, contact your lender immediately. They may be willing to let you pause your payments for a short time. They may also be willing to modify your loan terms to make your payments more affordable. This could help you weather a temporary financial problem.

Refinance your auto loan

Refinancing is when you get a new loan to pay off your existing loan. A new loan with a lower interest could help make your loan more affordable by reducing interest fees.

You could also get a new loan with a longer repayment term to lower your monthly payment. If you don't also reduce your interest rate, however, it could wind up being more expensive overall.

Refinancing works best if you've improved your credit since you got your original loan, as that should help you get a lower interest rate.

Sell your car

If your car is worth more than your auto loan balance, you could try selling it and using the proceeds to pay off your lender. You can then try to find a less expensive car with payments you can afford.

You'll generally get a better price on your vehicle if you sell it privately versus selling to a dealer or trading it in. Check a reputable source, like Kelly Blue Book, to get an idea of your car's value to start.

Surrender your car

Maybe you can't sell your car for a large enough amount to pay off your auto loan, but you know you also can't afford your monthly payments. In that case, you could surrender your vehicle to your lender voluntarily. 

The voluntary surrender of your car might be a better strategy than waiting for them to repossess it. It still counts as a negative mark on your credit, but can have several advantages: 

• No surprise, middle-of-the-night repossession

• Could be slightly less damaging to your credit than a forced repossession

• Shows cooperation with the lender

The Bottom Line on Car Repossession

Having a car repossessed doesn’t automatically wipe out your auto loan debt. If you have a balance that isn't payable, don't assume that having your car repossessed is the best solution. Instead, talk to your lender and find out what options you have.

If you're also struggling with unsecured debt, like credit cards and personal loans, consider talking to a debt relief company. While auto loans aren't typically eligible, debt settlement could be a solution to get rid of other debts and make more room in the budget for your car loan.