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Car repossession has increased rapidly since 2020, according to reports from Jalopnik. If you fall behind on your payments and your vehicle is at risk of repossession, the good news is that you can take steps to stop this unfortunate conclusion. Between reinstatement and loan modification, there are multiple opportunities to avoid repossession.
Does paying off a car loan stop the repossession process?
The rules of repossession vary based on the state you live in. In most states, the lender can repossess the vehicle as soon as you are in default. Depending on your loan agreement, that could mean missing just one payment.
There are several steps between missing a payment to the ultimate repossession of your vehicle. Based on your current situation, you can take the appropriate actions to prevent repossession.
If you haven’t received any notice
If you can’t make your car payment, you’ll likely know about that financial reality well before your lender does. Instead of waiting for the lender to find out when you miss a payment, be proactive and call the lender to explain your situation.
The lender may be willing to hear you out to avoid the expense of repossession. Try to come to a reasonable solution together. For example, you can offer more information about your situation, when you can make the next payment or what you can pay right now.
Depending on your history with the lender, you might be able to work out a temporary reprieve or rework your loan agreement. This is especially true if this is the first time you have ever missed a payment.
If the lender has only sent notice
A lender can legally repossess your vehicle with or without notice in many states. But your lender will likely send you a notice about its intention to repossess the vehicle before it actually happens.
If you receive a notice of repossession, the first call you should make is to your lender. Again, an open line of communication between you and the lender may result in a solution that avoids repossession.
Waiting until you receive a notice means that you’ll be playing catch-up when explaining the situation to your lender. If the lender is willing to hear you out, offer as many details as possible about when you can make a payment. Also volunteer how much you have available to put towards a payment today.
Ultimately, it can be in the lender’s best interest to work out a temporary arrangement. After all, the business wants to get paid, and you will likely need your car to get to work. Depending on the lender and your history, a temporary agreement is not out of the realm of possibility.
If the lender has started the process
If the lender has already started the repossession process, you may not have access to your vehicle. At this point, reinstatement of your loan — also known as curing the default — could be the best possible outcome.
In some states, you’ll need to pay the entire past-due amount. That includes every missed payment plus any late fees that have accrued. Typically, the lender will also require you to cover repossession fees before releasing the vehicle to you.
In other states, you might have to pay off the entire loan to get your car back — that process is called redemption.
Not every state allows for reinstatement. If your state doesn’t have reinstatement laws and it isn’t built into your contract, you should still reach out to your lender. It may be willing to modify your loan to include it.
How auto repossession works
Auto repossession is an unpleasant experience. But understanding the process can help you work through it and potentially find a solution.
1. Borrower misses payments
Your lender has the right to repossess the vehicle as soon as you are in default — and to charge off your loan to a debt collection agency. The exact number of missed payments required to default on your loan depends on your state and your loan contract. In some cases, you will only need to miss one payment to be in default. In other cases, you might need to miss two or three payments for an issue to arise.
At this stage, open communication with your lender is critically important. If it’s possible to work out a reprieve, now is the time to ask.
2. Lender takes your car
Once in default, your lender may or may not send you a notice of its intention to repossess the vehicle. Call your lender to ask for a temporary payment arrangement to avoid repossession if you receive a notice. Depending on your state, the lender may be able to repossess your car at any time — whether or not you’ve received a notice.
3. Lender sells the vehicle
Once the lender has possession of your vehicle, it could hold onto the vehicle until you catch up on your loan. But the more likely outcome is that the lender will sell the vehicle. In many states, the lender must notify you of the sale and give you the chance to reinstate your loan.
If you want to buy the car back before the sale, you’ll have to pay the full amount owed and any repossession expenses. But many repossessed cars are sold at auction. You have a right to be there and place a bid on your vehicle.
4. Lender sends your bill for any deficiency
After selling the vehicle, the lender must use those funds to cover what you owe. But the sale price may not be enough to cover your entire debt. If you owe more than what your lender gets for selling the car, that’s a deficiency.
And unfortunately, in most states, your lender can sue you for any deficiencies. For example, let’s say that you owe $10,000, but your lender only sells it for $7,000. In that case, the deficiency is $3,000, and the lender may have the right to sue you for the difference.
However, if there is a surplus from the sale, the lender may be required to pass it to you. This is rare, but if it does happen, you will at least have a small benefit from the sale.
Other ways to avoid repossession
Avoiding repossession is a top priority for most borrowers. After all, your vehicle is likely a key piece of your ability to earn a living.
A few ways to avoid repossession include:
- Reinstate the loan: If you can get current on your past-due payments, the lender will reinstate your loan. Essentially, that means you are bringing the situation back to square one. Once reinstated, you’ll need to continue making your regular car payment.
- Pay off the loan: Of course, paying off an entire auto loan is easier said than done. But if this option is within reach, it is one way to exit this situation.
- Refinancing: This can be difficult given your credit score takes a hit from missing payments. But if you can find a new loan with a lower interest rate or monthly payment, refinancing your auto loan could be the right move for your finances.
- Declare bankruptcy. If you are behind on other bills, bankruptcy may be an option. However, while there are ways to keep your car during bankruptcy, it’s not a guarantee. Repossession may still happen if you aren’t able to find a workable solution.
The downside to these options is that you’ll likely need to come up with some amount of cash to resolve the situation.
The bottom line
If you find yourself staring down the uncomfortable possibility of repossession, talk to your lender as soon as possible. With open lines of communication, the lender may offer a deal that works for everyone.