A vehicle repossession has the biggest impact on your credit rating when your auto lender first reports it to credit bureaus. A repossession won't completely ruin your credit rating but it will cause significant damage to it and make it more difficult for you to get credit cards and loans for several years.
Credit Rating
A vehicle repossession remains on a credit report for seven years and it will have a negative effect on your credit rating throughout that time. Nonetheless, Experian indicates that a repossession has less of an impact on your credit rating throughout the seven years as time passes. That's especially true if you manage your other bills well by paying them on time and keeping your credit card balances low. The Fair Isaac Corporation created the FICO credit score and the company recommends using no more than 30 percent of all of your available credit lines.
Voluntary Repossession
A voluntary repossession takes place when a car owner chooses to turn over his vehicle to his lender because he can't make the required monthly payments on an auto loan. The owner can avoid paying the lender's repossession fees by voluntarily turning over his vehicle. However, that usually won't lessen the damage done to the owner's credit rating. Any type of car repossession signifies that the owner didn't repay a loan as required, and the failure to repay a loan is what damages a person's creditworthiness.
Loan Balance
Lenders usually sell repossessed vehicles to recoup a portion of the remaining loan balance. The vehicle owner is responsible for paying any remaining portion of the balance that the sale of the vehicle doesn't cover. Lenders can turn over the unpaid portion of the balance to a collection agency, which can cause further damage to your credit rating. It may be better to pay the balance in full instead of negotiating to pay a smaller amount, according to Bankrate.com. Lenders who consider giving you loans in the future may view an account that appears on your credit report as "paid in full" more favorably.
Considerations
Expect to get less favorable credit and loan terms after a vehicle repossession, at least while the repossession remains in your credit file. Creditors and lenders will classify you as a high credit risk after a repossession. As a result, you will likely have to provide a big down payment to get another car loan. Your interest rates on credit cards and loans also will be high. It may be best to avoid applying for credit cards and loans for a year or more after a vehicle repossession while you build a consistent repayment history on your other accounts.
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