4 Ways to Avoid Repossession

Repossession of your vehicle makes an already bad credit situation worse. When you borrow to buy a car, the lender holds the lien on the vehicle. Failure to pay means the lender can take your car back. But typically this is a last resort. The lender wants you in the vehicle paying off your loan. If repossession proceedings are started, it means you already have missed payments and that already has impacted your credit score. A repossession means further credit downgrade, possibly being listed in default. If faced with the possibility of repossession, here are four strategies for avoiding it.

1. Refinance Your Loan

In a refinance, you take out a loan to pay off a loan. Typically, you refinance when interest rates have dropped and you can get a lower monthly payment, which will offset the cost of getting the second loan. Cars are seldom refinanced because they lose value over time making the second loan harder to get, and they are for a shorter payout term, making it harder to recoup your loan closing costs.

But if you are faced with repossession, it could be an option. If interest rates have dropped or if you can negotiate a longer payout term, your monthly payments could go down, making the loan affordable for you.

In any repossession scenario, it will pay you to contact your lender before you start missing payments. Not only can missing payments result in penalties, any payments missed will be rolled into the refinanced loan.

2. Deferment

Depending on your lender, you might be able to defer making payments on your loan for a negotiated number of months and avoid repossession. This is particularly possible if you are in a short-term financial crunch, and the lender can see that you will be able to resume making payments in the near future.

Be aware, even if payments are deferred, interest is not. The interest you owe on the loan will continue to accumulate. That interest and the payments missed will be added to the total loan amount.

As with refinancing, act early, before missing payments.

3. Trade Down

Many repossession problems arise because a person bought more care than was wise for his or her budget. Consider working with your dealer to trade the car for one of lesser value and with a loan that you can afford. Even if you are upside down in your car loan, that is if your car is worth less than the loan amount, you might be able to cover that with a new loan on a car of lesser value. In that case, you will immediately be upside down in the new car as well, but that could be preferable to having a repossession on your credit history.

4. Sell

This is the most drastic solution. If you can sell the car and pay off your loan, your remaining problem is transportation. In that event, sharing a car with your family, doing without a car or using public transportation are better solutions than defaulting on your loan and facing repossession.


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