How a Repossession Affects Your Credit
September 24, 2019
Repossessions are a negative item listed on your credit report that note the seizure of any assets due to late or delinquent payments. If a repossession is listed on your credit report there is still help to rebuild your credit and potentially remove the listing from your credit report.
What is a repossession?
Repossessions occur when an asset purchased on credit is behind on payments- usually for three months or more. If a lender thinks the owner is not going to catch up on payments, they may decide to repossess the property.
Repossessions are most common with car loans, but they can apply to any loan that involves collateral, like buying furniture on credit with a furniture store.
Once a creditor repossesses the collateral they usually try to resell it to recoup their money. For things that depreciate over time, like cars, the lender won't recoup the full amount of the loan because the car is worth less than when the consumer first bought it. When a lender sells items for less than what you owed, they'll come after the purchaser for the difference. This means that even though you've returned what you bought following a repossession, the creditor may still go after you for damages.
How long do repossessions stay on a credit report?
A repossession can stay on your credit report for up to seven years making it even harder for you to qualify for other loans. However, there are ways that you can get them removed if they are reporting inaccurately, unfairly, or can’t be verified by the original lender. Repossessions have a severely negative impact on your credit and can show lenders that you may not be able to make payments on the property you purchase.
How Repossessions Affect Your Credit Score
When you have a repossession on your credit report, you can expect your credit score to drop about 100 points, but it really depends on your credit situation. Here are some ways that repossessions can affect your credit:
- Late payments: Items can be repossessed because you missed several payments and those will show on your credit report, which hurts your credit score.
- Repossession: Once something has been repossessed, the lender usually reports it to the credit bureaus. This ends up hurting your credit more than late payments do.
- Collections: If you still owe money even after the lender has resold the car, they might decide to hand over your account to a collection agency. That collection can also show up on your credit report, further damaging it.
- Judgments: If you don't pay what you still owe, then either the lender or the collection agency they appoint can try to sue you. That judgment can end up on your credit report, which is another blow to your credit. Not only that, but with a judgment, the judge can order to have your wages garnished until the debt is paid, which can hurt your finances.
All of this is telling other lenders is that you can't be trusted to pay back what you owe and as a result, they're less likely to approve new credit applications. Apart from losing your property, a repossession could lead to several negative items on your credit report, which will damage your credit score.
A voluntary repossession is when a consumer can no longer make payments on the property they bought and voluntarily give it back to the lender. There is a common misconception that a voluntary repossession is better for your credit than a forced repossession. In financial and credit terms, they're both the same.
Whether you voluntarily ask your lender to come and pick up their property or you are forcibly repossessed, the message is the same—you are unable to pay your loan, and the lender is taking back their property to try and recoup their money. One benefit of voluntarily surrendering your property is that it is less emotionally draining and embarrassing than having a forcible repossession, which can happen at any time and any place. Voluntarily repossessing your property gives you a bit more control and usually ends up costing less.
Can Reposessions be removed from a credit report?
Although a repossession can stay on your credit report for up to seven years, it doesn't have to. There are a couple of different things you can do to try to remove one:
- Negotiate with your lender: Your lender loses money when they repossess. Paying off your debt is cheaper and more convenient for them, even if you pay less than what you owe. You can try renegotiating with them to see if you can settle your debt and remove it for your credit reports. If you can get them to agree to this, make sure to get it in writing and that you follow through with the terms you and the lender agreed to.
- File a dispute: If you go through your credit reports and see anything being reported inaccurately about your repossession, you can dispute it with the credit bureaus. If you do this, the credit bureaus must investigate and will as the creditor to verify the information. If the lender can't prove that the debt is valid, then the credit bureaus can remove the repossession from your credit reports.
How to prevent a repossession
Many people go through financial troubles at some point. If you're struggling to stay on top of your payments, you should communicate this with your lender to see if you can change your payment plan. For car loans, If you know your financial hardships are going to be temporary, you can talk to your lender and see if they'll let you skip payments for a month or two. Some auto lenders allow this without penalizing you, but you need to communicate with them, or else you will be penalized. Working things out with your creditor may prevent a repossession and allow you to keep the property.
Can I get a loan after a repossession?
The short easy answer is yes, you can still get a loan after a repossession. There are very few lenders who are willing to take that risk, and many will make you pay higher interest rates and fees. However, there are reputable lenders out there who approved applications with repossessions on them. Additionally, for better chances of approval and better interest rates, you can find someone with good credit to cosign the loan for you.
How can I improve my credit after a repossession?
If you do get approved for a loan or a new line of credit after a repossession, making payments on time can help you build your credit back up. If you dispute the repossession and can't get it removed, then you need to give it some time. Your credit score will eventually improve and the repossession will come off your credit reports. However, as you open new accounts and make on-time payments, you should see your credit improve.
If you're struggling with a low credit score or other negative items on your credit reports, Lexington Law Firm can help you. For over a decade, our team of consumer advocates have been helping clients challenge negative information that is unfair, inaccurate, and unverifiable. Contact us today for a free personalized credit consultation.
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