Repossession won’t forestall car debt

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Dear Debt Adviser,
I had a successful career in retail but lost my job thanks to the economy. I am now in college and have a large loan on a defunct car. The interest rate is nearly 20 percent. My credit rating is poor, as I have had a bankruptcy and several defaults in the past seven years. I am thinking of defaulting on the car loan and having the car repossessed. I can’t make the payments and surely it won’t do much more damage to my already poor credit. Is there any reason not to do this?

Dear Michele,
The new year is here and it’s time you tried something new. Your pattern of defaults and bankruptcy is not something I want you to carry into 2011. That’s because it will be damaging in ways you may not have experienced — yet. Start by recalling the last time debt collectors hassled you. Without the option of a bankruptcy to make them go away, you will now be exposed to the best and worst of their tactics for years to come. Continued bad credit can keep you out of decent affordable housing. It will definitely hurt your re-employment prospects. The list goes on, but I think you get the picture.

Having your car repossessed will not solve your problem. Your car loan is secured by the vehicle. If you default, the lender will repossess the car. However, repossession does not satisfy the loan. In fact, it’s only the beginning of a new problem. You’ll have no car, probably no way to get another car, and you may still owe a lot of money on the repossessed vehicle. Some deal!

Often a repossessed car is sold at a wholesale auction, frequently for much less than the outstanding loan balance. The proceeds from the sale are applied to the loan after expenses for the repossession and selling costs. If the sale price minus expenses covers what you owe, all you get is worse credit and the aforementioned problems. But if the proceeds come up short, you still owe the remaining balance.

For example, let’s say you still owe $10,000 on your car loan. Your car is repossessed and sells at auction for $4,000 and that amount is applied to your loan balance. You are still responsible for the $6,000 difference, not to mention repossession expenses, legal fees and auction costs.

I recommend you determine what you could realistically get for your car. In most cases, you should be able to sell the car yourself for significantly more than it would bring at auction. Then explore how you could cover the difference between the sale price and the loan balance. Some ideas include part-time employment, borrowing from a friend or family member, or selling an asset.

Should you let the car be repossessed, expect to be contacted by the lender for payment. If you don’t pay, the lender will likely begin aggressive collections promptly. Given that you have hopes for the future once you finish college, I suggest you begin rebuilding your credit now and do not create any future problems.

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