How does repossession work?

If you fall behind on loan payments for your car or home, you could potentially lose the asset through the process of repossession.

Repossession is basically when the lender takes legal possession of the asset. The details depend on the loan agreement you signed – but the reality is that the lender likely has the legal right to take away your vehicle or even your home, should you default on the loan. 

It’s a scary thought but repossession can be avoided by staying on top of your finances. 

What do you need to know about repossession? And how does repossession work? We’ll cover that and more in this article. 

What is repossession?

Repossession is when a lender takes back the property after a borrower has defaulted on a loan. 

For example, let’s say a person buys a car using an auto loan. They lose their job, causing them to fall behind on payments. If the loan enters default, the bank that provided the auto loan can take away the vehicle. In most cases, the bank would then sell the vehicle in order to recover the funds they lost from the loan. 

Repossession only applies to secured loans. 

Secured loans have collateral involved. Collateral is an asset that you provide to secure the loan. When you buy a car using a car loan, the vehicle itself is the collateral.

Unsecured loans do not have any collateral. Credit cards and personal loans are examples of unsecured loans. If you default on credit card payments, it will hurt your credit and you may face fees — but the credit card company can’t take away your vehicle or your home. 

Now that we understand the basics of repossession, let’s dive deeper into how repossession works. 

How does repossession work?

As mentioned, repossession only applies to secured loans. 

A secured loan works like this:

• The borrower takes out a loan to buy the asset (a vehicle, for example)

• The borrower agrees to repay the loan over a set period of time

• Most loan agreements require monthly payments

• If the borrower misses payments or is late, the loan can go into default

• Loan default terms depend on the specifics of the loan agreement

• In some cases, default can be triggered by a single missed payment

If the borrower misses payments, the loan will eventually enter default (how long this takes depends on the loan terms). At this point, the lender has the legal right to take away the vehicle or asset that has secured the loan. 

The bank/lender may repossess the item themselves or they may use a repossession company. 

What can be repossessed?

Any item used as collateral on a loan can be repossessed. 

Any time you take out a loan to directly pay for something, that asset can likely be repossessed. This includes:

• Vehicles

• Real estate

• Rent-to-own items

Items put up as collateral on secured loans can also be repossessed. For example, if you put up your home as collateral for a large loan, you could lose your home in a repossession if you default on the loan. 

How quickly does repossession happen?

Repossession can happen as soon as your loan enters default. 

However, when a loan enters default depends on the specifics of the loan agreement. In general, this will be somewhere between 30 and 90 days after missing a payment. 

Once a loan enters default, the lender has the right to repossess the asset at any time. Most states don’t require any advanced notice, which means the bank can repossess the vehicle at any time if the loan is in default. 

How does repossession work if the borrower takes steps to remedy the situation? 

Fortunately, banks will generally make an effort to help borrowers catch up on payments before repossessing an asset. 

If a borrower misses a payment, they will typically receive a late payment warning. They will also likely receive a letter explaining that the loan is at risk of entering default. 

Repossession and your credit score

A repossession can have a substantial negative impact on your credit score and credit history.

A repossession is considered a derogatory mark –  or a negative record that is added to your credit history. All future lenders will be able to see this negative mark when they pull your credit. 

And the damage doesn’t stop there. You may also have other negative marks on your credit score either before or after the repossession happens:

• Each of your missed payments will add a negative mark to your credit

• Defaulting on the loan adds a negative mark

• Entering collections adds a negative mark

• Court judgments from unsuccessful collections may cause a negative mark

A repossession is likely to drop your credit score by at least 100 points. And unfortunately, the repossession and related missed payments will stay on your credit report for 7 years.  

How to avoid repossession

The best way to avoid repossession is to avoid letting a loan go into default. 

If you miss a payment, do your best to pay it as soon as possible – along with any late fees that may be added. 

If you’re unable to make a payment, contact the lender as soon as possible. Lenders may have some flexibility in delaying the default process, or they may have hardship programs in place to help borrowers. In some cases, a lender may agree to defer your loan payments for a few months, giving you some time to catch up. 

If your monthly payment is too high and you know it will soon cause financial hardship, you can also consider refinancing the loan. In some cases, this could lower your monthly payments, making it easier to stay on track. 

Finally, you may consider a voluntary surrender of the vehicle or other asset. This is similar to a repossession but it involves the borrower working with the lender to voluntarily deliver the collateral. Voluntary surrender has a similar financial effect but it may have a slightly less negative effect on your credit score.  

Avoiding repossession is vital for protecting your finances. Paying off high-interest debt, like credit cards, can also benefit your financial wellbeing. 

If you have credit card debt to pay off, the Tally† credit card debt repayment app may be able to help. Tally may help qualifying Americans consolidate their debt and save money on interest. 

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.