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Can you pay off a car loan to avoid repossession?

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Repossession of a vehicle is an experience every driver wants to avoid. 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.  

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 from missing a payment to the ultimate repossession of your vehicle. Based on your current situation, you can take the appropriate actions.  

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.  

In most cases, the lender will be willing to hear you out. Try to come to a reasonable solution together. For example, you can offer more information about exactly what your situation is, when you can make the next payment or what you are able to 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 

Technically, a lender can repossess your vehicle with or without notice. But in many cases, the lender will 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 could be the best possible outcome. In some states, that means you’ll need to pay the past-due amount.  

Typically, the lender will also require you to cover any repossession fees before releasing the vehicle back to you. In other states, you might have to pay off the entire loan to get your car back.  

How auto repossession works 

Auto repossession is an unpleasant experience. Although it might be uncomfortable, here’s a close look at the process.  

1. Borrower misses payments 

Although the lender has the right to repossess the vehicle as soon as you are in default. The exact number of missed payments required to default on your auto varies based on your state. 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. Regardless of if you receive a notice, the lender may repossess your car.  

3. Lender sells the vehicle 

Once the lender has possession of your vehicle, it can 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 most states, the lender must notify you of the sale.  

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 can use those funds to cover what you owe. But the sale price might 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.  

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: If you don’t have the cash to pay off the loan, considering your other loan options could be worthwhile. It 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, refinancing your auto loan could be the right move for your finances. You can potentially avoid repossession and save on your car payment in one fell swoop.  

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. 

 

Written by
Sarah Sharkey
Contributing Writer
Sarah Sharkey is a contributing writer for Bankrate. Sarah writes about a range of subjects, including banking, savings tips, homebuying, homeownership and personal finance.
Edited by
Auto loans editor