When you finance a vehicle, it can be difficult at times to keep up with car payments. If you’re struggling to make full, on-time payments on your car and eventually become delinquent on your car loan, it’s likely your vehicle will be repossessed. This can cause undue stress, mainly if you rely on your car to commute to work or school or need transportation for other reasons.
While it may be more challenging to finance a car after repossession, getting a car loan is possible. Here’s how to get a car loan after repossession in steps.
How Auto Repossession Works
Before you can take the necessary steps to secure a new car loan, it’s helpful to understand how auto repossession works.
When you get an auto loan, the lender you financed the car through owns the vehicle until the loan is paid off. For as long as you still owe money on the vehicle, and if you stop making loan payments entirely, the lender has the right to take possession of it.
Once your vehicle is repossessed, the lender may sell it at auction. If it’s auctioned for less than what you owe, you might still owe the difference to your lender or have to pay for additional repossession expenses, such as storage, attorney fees, and other related costs.
Depending on which state you live in and what lender you finance with, repossession laws and rules may vary. For instance, the length of time you can be delinquent on your car loan before it’s deemed to be in default differs among lenders. In some states, as soon as you’re in default, lenders may be allowed to seize your car without notice.
It’s essential to look into state and local laws and regulations to understand how repossession works around you and understand your rights. For instance, if a lender tries to remove your car from your closed garage without permission or causes damage to your property, these actions likely violate the law.
How Repossession Affects Your Credit
In addition to putting you in a more challenging personal financial situation, car repossession can stay on your credit report and affect your credit scores for several years.
From the date of your delinquency, the repossession may show up on your report for seven years. As long as it remains on your credit, your credit history will be impacted. From late payments leading up to you defaulting on your loan, to the lender reporting that you defaulted, to possible debt collections, each of these actions can negatively impact your credit situation by hurting your credit history and lowering your credit score.
Getting a Car Loan After Repossession
Even after your car has been repossessed, it is possible to get a car loan for another vehicle. However, it’s not without its challenges. Here are steps you can follow to help improve the likelihood of getting a car loan.
1. Monitor and Boost Your Credit
If your car has been repossessed, it’s likely your credit score is going to suffer. However, while your credit report will reflect this for several years, this bad credit is not permanent. By working on developing and maintaining good credit, you can gradually reduce the repossession’s impact on your credit situation.
To help boost your credit, you should regularly monitor your credit and practice healthy spending habits. For instance, if you have other credit cards, either halt spending or ensure you can make monthly payments in full and on time. It’s also a good idea to obtain a copy of your credit report and assess other areas you may be able to address to further improve your credit score.
2. Determine What You Can Afford
Car repossession can occur when a borrower purchases a car beyond their means and simply can’t afford the car payments. If you bought a car that was too expensive for you the first time around, you must budget and assess what you can afford with your next vehicle. Getting pre-approved can help give you an accurate idea of what your loan rate will be.
To avoid falling into the same situation, make sure you are realistic about how much you can afford, including the total loan amount, down payment, and monthly payments.
3. Apply with a Co-borrower
You can improve your chances of getting an auto loan after repossession by having a trusted member of your family cosign on the new loan. When you apply with a co-borrower, the lender will consider not just your credit history but the person you are co-borrowing with. If they have excellent credit, you are more likely to be approved.
If you opt to go this route, both you and your cosigner must understand the terms and conditions and the financial risk. By co-signing on the car loan, they assume responsibility if you, the primary borrower, stop making payments on the payment plan. Should you not meet this financial obligation, you could jeopardize not only your financial and credit health but also your cosigner’s.
4. Save Up for a Down Payment
If you cannot get a co-signer on a car loan after repossession, another way to improve your chances of getting approved for an auto loan is to make a bigger down payment. Most financial experts recommend putting down 20% of the car’s price, especially for new vehicles. The more you can save up for a bigger down payment, the more favorable your application will be to lenders, and the better off you’ll be financially.
5. Choose the Right Lender
After a vehicle repossession, it may become a bit more difficult to find lenders that will extend credit to you. Because payment history is one of the most influential factors determining your creditworthiness, a default may exclude you from receiving a car loan through some more traditional lenders.
If a bank, credit union, or other lender does approve you for an auto loan, it’s important to note that you may face higher interest rates due to a lower credit score, longer loan term, and other factors.
Shop around and look for a lender that will offer auto financing to customers with lower credit scores.
While repossession affects your credit score and may make it more challenging to finance another car, you can take steps to get a car loan after repossession. By taking actions like improving your credit score, being realistic about what you can afford, and saving for a bigger down payment, you can get approved for a new car loan.
At T&I Credit Union, we offer great rates and terms for both new and used cars. Call us at (248) 397-9345 to apply for a car loan.