How Many Points Does a Repossession Drop Your Credit Score?

If you financed or leased a new car and can no longer make payments on your vehicle, you may be wondering how many points does a repossession drop your credit score? We will answer this question in much detail below.

How Many Points Does a Repossession Drop Your Credit Score?

A repossession can make your credit score drop by more than 100 points, causing extensive damage to your credit. Also, a repossession, commonly known as a repo, and any late payments on your car loan will stay on your credit report for approximately seven years from the date you missed your first payment.  Both a voluntary repossession and an involuntary repossession will have the same impact on your credit score. After the bank has repossessed your vehicle, you may still owe the bank money. For example, if you owed $20,000 on your car and the bank was only able to sell if, for $15,000, the bank will likely come after you for the remaining $5,000. People often believe that a repossession is over once the bank takes back the vehicle, but the truth is that a repossession is only the beginning of the process.

When people can no longer make payments on their car, they often believe that ignoring the bank or lender is the best thing to do to avoid trouble, but ignoring the bank is the worst thing that you can do to your credit. The best thing to do is answer the bank and work out a plan to go forward. Sometimes the bank may be willing to work with you, while other times they may not be so lenient. You may be able to avoid having your car repossessed by borrowing money from friends or family to pay off your vehicle to avoid having a repo destroy your credit. It may sound crazy, but many people have resorted to doing this to avoid the damage that a repo can cause to their credit.

Impact That a Repossession Will Have on Your Credit Score

If you do not want to destroy your credit, you should do everything possible to avoid having the bank repossess your car. We will now discuss the variety of reasons why a repossession will damage your credit.

Late Payments

A repossession will drop your credit score because the bank can only repossess your vehicle after you have stopped making payments on the loan. For example, if you’re financing a Nissan Altima, the bank cannot repossess your Altima until you have stopped making payments on your auto loan. When you stop making payments on your auto loan for 60, 90, or 120 days, these late payments will be reported to the credit reporting agencies. The late payments alone will cause your credit score to drop significantly. This is so because your payment history accounts for 35% of your credit score. So, not making payments on your car loan will result in your credit score dropping.

Repossession of Your Car

Whether you voluntarily or involuntarily have your car repossessed, the repossession will cause your credit score to drop because it will show up as a possession on your credit report under the (manner of payment) section for the loan. So, whether you voluntarily drive down to the dealership to surrender your car or a repo agent snags it while you’re at the mall shopping, the impact to your credit score is the same.

Collection Account

After the bank repossess your car, they will likely take it to the auction to sell it. In most cases, the bank does not get the amount the you owe them from selling the car, so the bank places a collections account on your credit report to collect the amount you still owe them. For example, if the bank repossesses your car and sells it at the auction for $15,000 but you owe the bank $20,000, the bank may attempt to collect the remaining amount (deficiency) from you in a lump sum.

However, if the bank is not successful in collecting the remaining amount, it will sell the debt that you owe to a collection agency. The collection agency will then attempt to collect the remaining amount from you. When attempting to collect the debt, the collection agency may place a collections account on your credit report, which will cause further damage to your credit score.

How to Avoid a Repossession and Subsequent Drop in Your Credit Score?

Here are a few tips and tricks from Credit Score Planet that you can use to avoid having a repossession drop your credit score:

Deferment of Loan Payments

Oftentimes when a person is late on his car payments, he or she thinks that the best course of action is to ignore the bank’s annoying phone calls. However, this is the worst thing you can do for your credit score. If you know you cannot make your car payment, you should contact your bank and ask them to purchase one or two of your payments to the back of the loan. Most banks are willing to allow borrowers to push up to two payments to the back of the load, giving you some breathing space and time to come up with payments for your car. Banks typically allow borrowers to do this once every years. So, if you think you’re going to be late on paying off your car loan, contact the bank and see how they’re willing to help you. Banks are often willing to help because they know they are more likely to get a bigger amount of their money back by helping you repay them than they are by repossessing your car and going through the hassle of selling it and recovering only a portion of their money.

Refinancing Your Car Loan

The second option that you have is to refinance your auto loan. This is a good option for those who have good credit and have not yet damaged it by failing to make payments on their auto loan. If you have good credit, you may be able to reduce your car payments by refinancing your auto loan. Refinancing may allow you to obtain a more favorable interest rate, as well as stretching out the repayment term, which will lower your monthly car payment, making it more affordable for you to pay off your car loan.

Selling Your Car

The third option that you have to avoid having your car repossessed is to sell your car and pay off the loan. That said, when pursuing the option, many people face the problem of selling the car for a price lower than that what they owe on the car, forcing the borrower to come up with cash to complete payment of the loan. Some people often resort to borrowing money to pay off the car to avoid damage to their credit. For others, this option simply doesn’t work.

How Long Does a Repossession Drop Your Credit Score For?

A repossession stays on your credit report for approximately 7 years, so it will cause a massive point drop as long as it’s on your credit report. That said, as the repossession ages, its impact on your credit score will begin to lessen. After seven years, it will be permanently removed. After a repo is removed from your credit report, you will gain all of the points that were dropped as a result of its presence on your credit report. So, after a repossession is removed from your credit report, you can expect your credit score to increase by as much as 100+ points.

Credit Score Planet Frequently Asked Questions

1) Why do repossessions happen?

Repossessions happen when a person does not make payments on an asset, such as a car or truck on time. As an account becomes delinquent (usually 60, 90, 120 days late), the lender will take action to obtain the car or arrest to sell it to recoup the amount of money it lent the borrower to purchase the asset or car. Repossession come in two flavors: voluntary repos and involuntary repos. With a voluntary repo, the borrower surrenders the asset and with an invulntary repo, the bank sends out someone to recover the asset so it can be sold and the proceeds used to make the lender whole.

2) Can a repossession by removed from your credit report?

A repossession can be removed from a person’s credit report under certain strict circumstances. Generally, once a repo is on your credit report, it’s very difficult to remove.

3) How much does a repo affect my credit score?

A repo affects your credit negatively, often dropping a person’s credit score by more than 100 points.

4) How long does it take for a repo to fall of your credit?

It takes approximately seven (7) years for a repossession to fall off of your credit report and no longer negatively impact your score.

5) How does a repossession affect buying a house?

Having a repossession will make it very difficult to buy a house because having it on your credit report shows lenders that you cannot responsibly repay the money that you borrow on time.

6) Is a voluntary surrender better than a repo?

When it comes to your credit score, a voluntary repo where a person voluntarily surrenders an asset is not better than an involuntary repo. Both count against you just as badly.