How Does Car Repossession Affect Credit Score?

Credit Damage Due to Late Payments or a Deficiency Balance

Oct 13, 2009

Repossession occurs when a borrower ceases to make payments on his or her car loan and will cause the borrower's credit score to drop substantially.

Lenders use credit scores to decide whether or not a consumer qualifies for a loan or line of credit. Car repossessions adversely affect credit scores and can result in a consumer being turned down for loans in the future.

How Repossession Works

Different lenders have varying standards when it comes to repossession of a vehicle. Some lenders initiate repossession efforts as soon as the first missed payment. Most, however, will wait a period of three to six months and grant the consumer the opportunity to redeem the car loan before repossessing the vehicle.

When a lender has to repossess a vehicle, the repossession is reported to the credit bureaus and appears on the consumer’s credit report. Repossessions are categorized as “Public Records” and appear in this section along with bankruptcies, foreclosures, judgments, and tax liens.

How Many Points Does a Repossession Cause a Credit Score to Drop?

On average, consumers can expect to see a decrease of anywhere from 50 to 150 credit points after a repossession appears on their credit report. The amount that a repossession will damage a credit score depends on how good the consumer’s credit was prior to the repossession. An individual with reasonably good credit can expect to be hit much harder by a vehicle repossession, while someone with bad credit may see his credit score altered only slightly.

The repossession itself, however, is only part of the equation. Payment history on debts accounts for 35% of every individual’s credit score. Late payments leading up to a car repossession will also be documented on a consumer’s credit report. Depending on how delinquent the car loan was prior to the lender opting to repossess, these late payments can have just as negative an effect on a credit score as the repossession itself, sometimes more.

Credit Damage May Continue After Repossession

When a car is repossessed, the lender will then attempt to sell the vehicle at auction. If the consumer owed more on the car loan then the lender was able to recover through the sale of the vehicle, the consumer now owes a deficiency balance. The lender will attempt to collect the full amount of the deficiency balance from the consumer.

In the event the deficiency balance is not satisfied in a timely manner, the lender may choose to file a lawsuit against the borrower for the remaining amount owed plus fees. If the judge finds in favor of the lender, a judgment will then be levied against the borrower. Judgments, like vehicle repossessions, also appear on credit reports as public records and have a negative effect on the consumer’s credit score.

After receiving a judgment, the lender can request that a writ of garnishment be issued by the local court if the state in which the consumer lives allows garnishment. A writ of garnishment gives the lender the right to garnish the individual’s wages until the debt is satisfied.

Like repossessions, judgments appear on credit reports for seven years but unlike repossessions, judgments are renewable. The length of time an unpaid judgment will appear on a credit report varies, but it could feasibly remain for up to twenty years.

The copyright of the article How Does Car Repossession Affect Credit Score? in Personal Debt Management is owned by Candice Gillingwater. Permission to republish How Does Car Repossession Affect Credit Score? in print or online must be granted by the author in writing.