Repossession happens more often than you might think. According to the Auto Auction Mall, which specializes in these deals, approximately 2.4 million autos were repossessed in the United States during the first nine months of 2019. That works out to more than 6,000 repossessions a day.
There are certainly repo cars for sale out there, and you can find repossessed vehicles if you know where to look. Whether buying one is the right move for you depends on a few factors.
How Repossession Works
It’s possible for lenders to repossess vehicles because auto loan contracts invariably stipulate that they – not the borrower – own the car until it’s paid off. The lender holds the legal title to the vehicle. They’re therefore perfectly within their right to send a tow truck to collect the car if the borrower defaults on the loan, typically by failing to make three or more monthly payments. The lender doesn’t have to take the owner to court first to get permission to repossess.
And that three-month deadline isn’t carved in stone. The law provides for only a 10-day delinquency in some states, and it could be even less in some areas.
The catch here is that the lender really doesn’t want the car. It wants the borrower to catch up on late payments and remain current heading forward, and some lenders are willing to work with borrowers to reach this solution instead.
Read More: What Happens If You Miss a Car Payment?
Pros and Cons of Buying a Repossessed Car
You’ll most likely pay less – sometimes a lot less – if you buy a repo car rather than a new car or a used car from a dealer’s lot. Repo cars are typically priced well under market value. Auto Auction Mall indicates that these cars can sell for as much as 40 percent less.
On the downside, there’s that old saying that you get what you pay for, and you’re paying for a vehicle that someone else couldn’t afford. There’s at least a fair chance that they didn’t spend anything on maintaining the car when they couldn’t even afford to make payments. Then there’s the matter of human emotion. It’s not unheard of for consumers to “trash” their cars when they know the repo man is coming.
You can almost certainly forget about your repo car coming to you with any kind of warranty or guarantee, and it’s a long shot that you’ll be able to test drive it, either – depending on where you buy it.
If You Know the Borrower
Perhaps the best way to buy a repossessed car is if you know the borrower well – maybe they’re your sibling or a good friend, and they confided in you. The lender is obligated to inform the defaulted borrower of when and where the vehicle will be sold after repossession. This gives the borrower – or a friend or relative – the ability to take steps to “redeem” or buy back the car.
Buy From the Lender
It’s sometimes possible to buy a repo car directly from the repossessing lender even if you don’t know the borrower, but you’ll have to identify those that make direct sales to buyers. Some prefer to use “repo seller” companies instead.
Contact banks and credit unions and ask for their repo files. The lender might even be willing to provide you with financing in exchange for taking one of these cars off its hands, particularly if you’re an existing customer who holds an account or two with them.
You have to make an offer or bid on the vehicle, and you might not be the only one to do so. This could result in a bidding war, so this approach might take several weeks. And you can almost certainly count on the vehicle not having been cleaned up or repaired in any way.
On the bright side, you could have access to the car before actually buying it. A test drive might not be possible, but you could take along your friendly neighborhood mechanic or someone else who’s auto-inclined to look it over for you. In any case, keep in mind that you’re buying the vehicle “as is.”
Read More: 10 Tips for Used Car Shopping
Buy From a Dealer
Another option is to buy from a car dealership that sells used cars – and most do. It’s not unheard of for dealers to get at least a portion of their used car inventories from repo auctions. In fact, it’s relatively common.
A dealer will almost certainly have cleaned up the car – aesthetically, structurally and mechanically – before depositing it on the lot for sale. You might even be able to get a mini-warranty if you buy a repo this way. It won’t be extended, but it might cover you for a month or so. You might even be able to get financing directly from the dealer.
You won’t get a rock-bottom price with a dealer like you would if you approached the lender directly, however. The bank is just trying to recoup some of the money it has tied up in the vehicle. A dealer wants to make a profit. You’ll probably pay the average used car price for the model, which negates a lot of the reason for buying a repo in the first place. But this doesn’t mean that you can’t at least try to negotiate.
Buy at an Auction
You can also purchase a repossessed car from the middleman rather than from the bank who first repossessed it or a used car dealer who grabbed it at auction. You can attend an auction yourself, if you can find one that's open to the public. But you’ll probably be sharing the space with and bidding against many experienced auto dealers.
You must typically register ahead of the actual auction date, and there might be a fee, but this will allow you to take a look at the available cars that are about to be sold. Online auctions might require that you have a dealer license.
Some auctions are offered by reseller services, either in person or online. These sellers want to make a profit, too, although typically not to the extent that a used car dealer would. Some prefer to sell a high volume of vehicles rather than strive to get top dollar for each one.
Other auctions are offered by state and local governments, although these vehicles typically don’t end up for sale because of delinquent car payments. They’ve been impounded for some reason, and the owner hasn’t redeemed them.
In either case, you might feel a bit over your head if you find yourself bidding against experienced dealers in a fast-paced sale – which you probably will – so you might want to register and attend a few auctions in advance to get the lay of the land and to make sure you understand the rules. You might have to make the purchase in cash or have a loan approval in hand.
These cars might not be cleaned up or repaired, either, although you might have better luck with this if you go to an online seller or a reputable reseller service. Again, you’re buying “as is” at an auction, so take advantage of any opportunity to inspect the vehicle first. You’re typically offered access before the bidding starts.
Read More: How Much Do Dealers Pay for Cars at Auctions?
- Trusted Choice: Learn How to Buy a Repo Car
- J.D. Power: How to Buy a Repo Car
- Auto Auction Mall: A Guide to Finding Repo Cars for Sale
- Your Auto Advocate: Buying a Repossessed Car: Here’s What You Need to Know
- AutoWise: 8 Things to Know About Buying Repossessed Cars
- Federal Trade Commission: Vehicle Repossession
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.