When a car is repossessed, the lender takes possession of the vehicle and typically sells it to recover the outstanding debt on the loan. The borrower is still liable for the difference between the sale price of the car and the amount owed on the loan, including any late fees, repossession fees, and storage fees. The lender can pursue the borrower for this deficiency balance through legal action, including wage garnishment or a judgment lien.
Here's what happens when a car is repossessed:
1. The lender sends a notice of default. This notice informs the borrower that they are behind on their payments and that the lender may repossess the vehicle if they do not bring the account current.
2. If the borrower does not cure the default, the lender may repossess the vehicle. The lender can do this without a court order in most states. However, the lender must provide the borrower with notice of the repossession and an opportunity to reclaim the vehicle.
3. The lender sells the vehicle. The lender must sell the vehicle within a commercially reasonable time after the repossession. The sale proceeds are used to pay off the outstanding debt on the loan.
4. The borrower is liable for any deficiency balance. If the sale price of the car is less than the amount owed on the loan, the borrower is liable for the deficiency balance. The lender can pursue the borrower for this deficiency balance through legal action.
5. Repossession can have a negative impact on your credit score. A repossession can stay on your credit report for up to seven years and can make it difficult to obtain credit in the future.
How to avoid repossession:
The best way to avoid repossession is to make your car payments on time and in full. If you are having difficulty making your payments, contact your lender immediately to discuss options for modifying your loan. Some lenders may be willing to work with you to prevent repossession by adjusting the terms of your loan or offering a temporary forbearance.
