If you fall behind on your car payments, you may fear that repossession will ruin your credit and prevent you from buying another car or qualifying for credit in the future. Losing a vehicle can affect your job, your family responsibilities and your finances.
A repossession will likely damage your credit, but the effects depend on your financial circumstances. The repossession itself is only one part of the financial picture.
How repossession can affect your credit score
Several factors can affect the impact of a repossession on your credit:
- Missing several payments before the lender takes the vehicle
- Having other late payments or unpaid debts on your credit report
- Starting with a limited or already damaged credit history
- Carrying a remaining loan balance after the vehicle sale
Late payments usually appear on a credit report before the repossession occurs. The repossession can then become another negative entry and affect future lending decisions.
Financial problems may continue after the vehicle is gone
Many people assume they no longer owe money once the lender takes the car. In many cases, that is not what happens.
After repossession, the lender will generally sell the vehicle and apply the sale proceeds to the loan balance. If the sale amount is less than the amount owed, a remaining balance may still exist. Fees related to repossession and sale of the vehicle may add to that amount.
Other ways a repossession may affect your finances
A repossession can create financial consequences that extend beyond the loss of the vehicle. Some consumers experience effects such as:
- Paying higher interest rates on future loans
- Having difficulty obtaining new credit
- Facing challenges when applying for housing that involves a credit review
- Spending years rebuilding their credit profile
A repossession can affect your finances long after you lose the vehicle because many lenders and other businesses review your credit history when making decisions.
Your financial future is not over
Losing your vehicle to repossession can damage your credit and leave you with additional debt if the sale does not cover the loan balance. However, the financial impact is not the same for everyone.
The long-term impact depends on factors such as your overall credit history, the remaining debt and your future financial decisions. Knowing how repossession can affect your credit may help you better understand the consequences that can follow the loss of a vehicle.