|By Kenneth Long on July 9, 2010
Repossession is an ugly event. You lose one of your biggest assets, suffer huge credit problems and then still have to find a way to get to work. If you had equity, you just lost it.
It can be embarrassing to lose a vehicle through repossession. The repo man might show up at your home or workplace unannounced. Imagine going out for lunch and your car is gone. Perhaps your boss, or even worse, your subordinates are watching your car get towed away because you missed your payments.
Television shows have popped up in recent years to detail how repossession agents track down and seize collateral when the owner fails to make their payments. It might be entertaining to the viewers, but it is real heartache for those who just lost their property.
If you are concerned that repossession is a possibility, then you do have some options:
Refinance the Loan
For starters, this is a good option for someone who has substantial equity in the vehicle and has yet to see a dip in their credit scores. Refinancing the loan so that a lower payment is possible can help you better afford the vehicle when times are lean. Sure you might pay more in the long run, but then again, you can always up your payments once your income improves. For everyone else, there are other guidelines.
Communicate with your Lender
Lenders do not want your collateral. They want you to honor the terms of your loan agreement. If you communicate with them your troubles and your plan for curing the delinquency, they are much less likely to pursue repossession. Even if they do, they may give you more time to try to catch up on payments if you keep those communication channels open.
Again, your lender does not want your collateral. They know you need it to get to a job, which allows you to earn money to make your payments. Voluntary repossession is just as detrimental on your credit report as involuntary repossession. If you do turn over the keys, there are two benefits. First, you may owe a smaller deficiency balance if you can avoid having repossession fees tacked on. Second, it might spare you the embarrassment of a repossession if you make the arrangements. Otherwise, you still are in violation of your loan agreement and can face the same consequences of defaulting on your loan.
Arrange a Sale
Lenders traditionally require that you repay the loan in full from the proceeds of the sale in order to release their lien on the vehicle. However, you may be able to successfully negotiate an arrangement with your lender to allow a sale for less than the balance. The lender would convert the difference to an unsecured loan that you would still have to pay off.
Avoid Illicit Activities
Some debtors take extreme measures to avoid repossession. If you intentionally destroy the vehicle or are negligent in such a way that someone else does, there are serious consequences in store for you. You will be prosecuted for insurance fraud, which could result in fines and jail time. Insurers may refuse to pay if fraud is detected. Even if they do pay, you would still owe the lender the full balance even though the insurer will likely pay you less. You would have been far better off with any other option.
Avoid Bad Loans
Finally, never finance a car at a buy here/pay here dealership. You are guaranteed to overpay for the car, get ripped off with a high interest rate loan and have little to show for your purchase. If you ever miss a payment, you should look over your shoulder immediately to see if the repo man is bearing down on you. These types of lenders are much less lenient than a bank or credit union. If you had gotten a loan from a reputable lender in the first place, you would probably owe less, have a lower payment and have more leniency from your lender.
If your vehicle is repossessed, you still may face a substantial deficiency balance. Most repossessed vehicles are auctioned at well below retail. Repossession fees, storage fees, late fees and even attorney costs can be added to the loan balance, leaving you with many thousands of dollars still owed and no vehicle to show for it. Certain states limit the deficiency balance that you may owe, so it is best to consult with a qualified attorney if you have lost your vehicle.