When you purchase a vehicle using a car loan, you’re promising to pay back the money in the form of a monthly car payment. If you fail to make that monthly payment at any point, the lender has the right to take the car back. The time frame for repossession of a vehicle depends on the lender, but you’ll usually be at risk after your payment is more than 30 days late.
How Car Payments Work
If you don’t have the cash to pay for a car outright, an auto loan can be a great option. A lender loans you the money to allow you to drive the car off the lot. You’re assigned an interest rate based on your credit score as well as a payment that's due at a designated time each month.
As with any loan, your car loan has a grace period built in. This grace period is detailed in your loan documents, but it’s typically 10 days. During this grace period, you can typically make the payment without accruing a late fee. After the grace period, you may not only have to pay that late fee, but it might also be reported to the credit bureaus.
What Is Repossession?
Your car loan is secured by the vehicle itself. That means if you don’t make your monthly payments, after a certain number of days, the lender can seize that vehicle to sell it and recoup some or all of the money you borrowed. Lenders are bound by state law as to how and when they can repossess a vehicle, though.
Whether your loan was a first loan or a refinance, if you slip into what’s known as “default,” a reputable lender usually sends you late notices to remind you to pay. After a certain time, which can be as little as 30 days with no payment, your lender may choose to repossess your vehicle. This means an auto recovery company arrives at your home or workplace and tows the vehicle away.
Read More: What Happens If You Miss a Car Payment?
How Does Repo Work?
When you don’t make your loan payments, most lenders make every effort possible to get you to pay. Usually, you can catch up without a repossession if you miss fewer than three monthly payments. But missing even one payment is considered a “delinquency.”
After a certain number of late payments, your lender declares you in default and starts the process to recover its losses. At this point, the lender contacts a third-party company known as an auto recovery service, and that company tracks down your vehicle’s location. Once it’s been found, a repossession agent, also known as a “repo man,” waits until the vehicle is unattended and repossesses it using a tow truck.
Maximum Number of Missed Payments
There's no fixed number of late payments that fits every single auto lender. During tough times like the coronavirus, many lenders may be a little more lenient with late payments. The best resource is your loan documents, which should at least mention the grace period you have, whether it’s 10 days or 30 days.
Obviously, it’s best to avoid even one missed payment since it can adversely affect your credit. But if you’ve missed one or two car payments, there’s peace of mind in knowing that many lenders don’t start the repossession process until you're behind by at least three payments.
Repossession Via Seizure and Towing
Chances are, your first warning that your car has been repossessed will be when you walk out to find it’s no longer there. By then, you’re probably well aware that you’re behind on payments. You have two choices at that point: Walk away from the vehicle or try to get it back.
Unfortunately, you can’t just go pay someone and drive it away. Your car was likely towed to an impound lot, where it will remain for a maximum of 30 days. During that time, you can recover your vehicle by paying all the past-due auto loan payments, along with any late fees that were added to it plus the fees charged by the impound lot and tow company.
If 30 days pass and you still haven’t claimed the car, the lender has the right to sell the vehicle. This is usually done at an auction, and sometimes at a loss to the lender. The lender’s goal is simply to reduce its losses.
Repossession Via Electronic Disabling Device
These days, repossessing your vehicle doesn’t always require a third-party vehicle recovery service. In some instances, dealerships installs what’s known as an electronic disabling device. This device disables your vehicle if you miss multiple car payments and ignore the late notices.
If your vehicle has a disabling device, you may already know about it. Some states require dealerships disclose it to consumers. But either way, if your car is remotely disabled, you won't be able to start it until you’ve made the payments. If you don't pay, the dealership will seize it at some point in order to auction it and sell it.
What to Do After Repossession
If your vehicle has been repossessed, your first move should be to contact the lender to see what you can do to resolve things. It may be a simple misunderstanding, in which case you should be able to get your car back quickly. However, if you know you’re behind on payments, you need to work with the lender to get your account back on track before your car will be released to you.
In some repossessions, lenders may be willing to work out a payment plan with the borrower. After all, a little money from you each month until you’re back on track may be a surer bet than trying to recoup the losses by selling the car. You may be able to agree to make extra payments each month and get the car returned to you.
If you can’t afford your monthly payments plus the overdue amount, or your lender won’t work with you, you need to let the car go. Make arrangements to get any personal property from the vehicle and make alternate arrangements for transportation until you can get back on track.
What Happens to Your Credit?
In addition to finding transportation, a repossession will cause you issues when you want to buy a new car. First, there’s the negative report on your credit for each late or missed payment. Then there’s a negative event because your loan went into default.
The repossession itself won’t hit your credit report, but the missed payments and default event will stay there for up to seven years. In that time, when you try to take out a loan, the lender will see that information on your credit report. That means it will be tougher to buy a new car and harder to get a credit card, get a mortgage, refinance a house or take out a personal loan.
Read More: Repossession or Charge-Off, What Is Worse?
Dealing With Falling Behind
The best way to avoid the repercussions of a repossession is to avoid falling behind on your auto loan in the first place. But this can be easier said than done. If you see trouble ahead, it’s important to get in touch with your lender as soon as possible to see what can be worked out. This often means setting up a payment plan.
If you can’t afford any loan payments at all at the present time, some lenders are open to a deferral. With a deferral, you can go a specific period of time without a payment in exchange for having the skipped payments tacked onto the end of your loan. Get any agreements in writing and make sure that there will be no changes to the terms of your loan as a result of the deferral.
Reducing Your Repossession Risk
The time to reduce your repossession risk actually starts long before you fall behind on payments. During the car-shopping process, you’re in the position to negotiate with lenders and dealerships to ensure that you won’t fall behind on your car loan later.
Here are some tips to help you prevent repossession from the start:
- Make a budget. Start by being realistic about what you can afford. Make a budget and look at the car loan payments that give you a little wiggle room. Picture the worst-case scenario and think of how long you could manage your payment if you lost your job or suffered another financial emergency.
- Choose a car and lender carefully. Once you’ve determined the monthly payment you can reasonably afford, it’s time to meet with a lender to discuss what car you can buy. A competitive interest rate allows you to purchase a more expensive car since that monthly payment will go more toward the principal than interest.
- Negotiate with the lender. Don’t be shy about speaking up if a payment turns out to be more than you planned. Remember that at the start of your relationship with a lender, you’re in the position to negotiate. If you see that the lender or dealership has tacked on fees that have bumped up your monthly payment far more than you’d originally planned, don’t sign the paperwork or take the vehicle.
- Refinance the loan, if needed. If at some point you find that your car payment is too much for your budget, considering refinancing the loan. You’re better off getting ahead of the issue than letting yourself fall behind on payments.
Leasing Versus Buying
Leasing can be a great alternative to pricey auto loan payments. Although leasing isn’t always the best option, your monthly payments for the same car are often cheaper. It can help you get into the car you want for a monthly rate that fits your budget.
However, just because you’re leasing, doesn’t mean you won’t face the same repercussions if you don’t make monthly payments. As with a car loan, one missed payment will probably result in late fees. Two or three late payments can put you in default, at which point your leased vehicle may be seized by the leasing company.
Read More: Buying a Car vs. Leasing
Late Payment Due to Circumstances
In some instances, lenders may take extra measures to help borrowers who can’t afford payments. This typically happens during natural disasters and other widespread issues. Most recently, it was seen during the coronavirus pandemic, when lenders like Ally Financial and Wells Fargo were offering deferments to any borrower who requested one.
With a deferment, the payments you skip are added on to the end of your loan. So if you have 15 months left on your car loan, a three-month deferral will now have you pay on that loan for 18 more months. If you sell the car before you pay off the loan, that’s three more months of payments that you’ll have to pay off when you sell the car.
Repossession and Your Rights
Even if you’ve fallen behind on your car payments, you do have rights. It’s not a free-for-all for a lender. By knowing your rights, you can make sure lenders are operating under local laws by watching out for some things.
Make sure, first and foremost, that your lender has given you the notice and legal grace period to get your payments on track before recovering the vehicle.
If an electronic disabling device is attached to your vehicle, check local laws regarding the use of these. A dealership may activate the device if your payment is four days late, for instance, which could be in violation of local laws.
Although a lender can seize a vehicle for nonpayment, that lender doesn’t have the right to seize and sell any personal property that was in the vehicle at the time it was recovered. If the lender is making it difficult to get that property, make sure you do your research and state your rights.
A recovery service can enter your property to take the vehicle. However, a repo man can’t “breach the peace,” which simply means they can’t use violence or threats. They also can’t legally break into a garage or storage facility to get the vehicle.
As long as you pay your loan on time each month, repossession should never be a problem for you. But no one is immune to tough times. If you think you might have trouble making your monthly payments, be sure to get in touch with your lender as soon as possible to work something out.
- Federal Trade Commission: Vehicle Repossession
- Pew Trusts: Late Payment? A ‘Kill Switch’ Can Strand You and Your Car
- Experian: How Does a Repossession Affect Your Credit?
- Consumer Financial Protection Bureau: Worried About Making Your Auto Loan Payments? Your Lender May Have Options That Can Help
- Credit.com: How Late Can You Be on a Car Payment, Mortgage or Other Bill?
- Student Debt Relief: Car Repossession and How to Avoid It
- Student Loan Hero: 6 Crucial Steps to Take If Your Car Is Repossessed
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.