Effects of Car Reposession on Your Credit

Car repossession is often emotionally devastating and also seriously damaging to credit. Auto repossessions are listed on credit reports for seven years, making it difficult to purchase another car on credit at favorable interest rates -- at least over the short term. Other negative effects are possible as well, with the bank allowed to take legal action for any remaining balance on the loan after the car is sold at auction. That information also is placed on credit reports, further harming credit scores.

Credit Scores

Everyone's credit situation is different, and no one can say for sure how much an auto repossession will hurt your score. Credit scores are three-digit numbers ranging from 350 to 850, with a 720 or higher score representing outstanding credit. People with sufficient income and very high scores often qualify for new car purchases with no money down. Scores below 620 are considered poor and lead to higher interest rates and mandatory down payments.

Risk Factors

People with high credit scores have the most to lose in an auto repossession. Someone with a 775 credit score is likely to experience a bigger decline in credit score than someone with a score of 450, for example. The person with the 450 score already has poor credit and the score simply cannot fall much more. However, there isn't a hard and fast rule for predicting credit score changes, although credit score drops of more than 100 points are possible.

Voluntary Repossession

Some people who know they cannot afford their cars arrange for voluntary repossessions. An appointment is made to turn over the car to the bank or credit union. This eliminates the embarrassment of having a repossession agent tow the car away in a forced repossession, but it does not lessen the impact on credit. In most cases the lender will list the the account as a repossession on credit reports even in a voluntary repossession.

Negotiations

Negotiation is sometimes possible to limit damage to credit scores, especially with a voluntary repossession. The lender may agree not to list the repossession on credit reports if the owner turns the car in and agrees to immediately pay any remaining balance on the loan after the car is sold at auction. Cars typically are worth less than the amount remaining on the loan, with the bank wanting full payment. In most states the first move by the bank after voluntary or forced repossession is selling the car at auction or a private sale. That's followed by sending the former owner a bill for the balance remaining on the loan.

Court Judgments

Banks usually file a civil suit if the former owner does not pay the remaining balance or fails to make payment arrangements. The suit is heard by a judge, who almost always rules in favor of the bank and awards a monetary judgment. Judgments also remain on credit reports for seven years and can lead to bank or wage garnishment. The judgment is treated as an unsecured loan, such as a credit card. That allows for the possibility of settling the judgment for less than the full balance.