Life is unpredictable, and tough times seem to fall on everybody at one point or another. Whether you’re facing the loss of a job, the death of a family member, a car accident, medical issues, or any other life disruption, losing the ability to pay your bills can often add insult to injury during this time. Seeing your car get towed away may seem like rock bottom, but there are steps you can take to come back after a repossession and build your credit again.
What is the credit impact of a repossession?
Well, it’s likely that your lender has been trying to contact you for a while, to no avail. And the first lesson you must learn is that avoiding the problem is never the answer. When you first realize you can’t make a payment, call your lender first thing and see what they can do.
But alas, life got in the way and here you are without a car. Your car is now going to be sold at an auction, but this doesn’t mean that you’re off the hook financially. It is likely to be sold for less than it’s worth, and if it is sold for less than you owe, you are still responsible for paying the difference.
In the meantime, the repossession will be reported and added to your credit report, where it will remain for seven years. In addition to that ugly term hanging around, your credit score will also take a significant hit, anywhere from 60-240 points according to Bankrate.com. It depends on where your credit score was before the repossession. If you had a high credit score, you can expect a larger drop in your score to now accurately depict your creditworthiness. If it was already low, the drop won’t be as significant but still large.
Over time, the repossession will account for less and less of your score, and hopefully, in the meantime, you’ve done some damage control to counteract the effects of it. But you will face some consequences in the meantime.
Will a repossession prevent other forms of financing?
A repossession will absolutely prevent you from securing additional forms of financing. After all, your credit report is intended to show lenders how responsible you are when it comes to repaying debt, and a repossession does not paint a pretty picture for you. Also, lenders will assume that if you had a hard time making your car payment, you likely had other financial troubles, which is likely the case. However, getting approved for financing after a repossession is not impossible, but there are a few factors to keep in mind when you begin the process.
Steps for Getting Approved after a Repossession
The first thing you must do is repay the remaining debt you owe on the repossessed car. At that point, you can request that the lender report the loan as “paid in full” or “satisfied,” which won’t erase the repossession but it will reflect some positivity on the situation.
As soon as you can, get a copy of your credit report from each of the three credit bureaus. Look for any mistakes that could be corrected, and dispute them immediately. Also take note of all outstanding debts you have, and make a plan for paying them off as soon as possible. If you have any other late payments, pay them as soon as possible.
As you move forward, keep your debt utilization under 30 percent at all costs. If that means freezing your credit card, do it. If that means selling some unnecessary items, or cutting out your morning coffee for a few months or canceling your gym membership, do it. It’s time to buckle down, make a budget, and stick to it, to end the vicious cycle of debt.
The next step is to wait. If you try to immediately jump into a car loan after a repossession, not only will you have an almost impossible chance of getting approved, but any loan that you will get approved for will have an astronomically high-interest payment. Give yourself a year or two to recover enough to get approved for a reasonable rate. In addition to taking the above steps during this time, you should also do what you can to save up a significant down payment, at least 20 percent ideally, to minimize any debt you’ll acquire and hopefully help you secure a lower interest rate.
When it’s time to apply, be honest. All of the information about the repossession will available to the lender anyway, so being dishonest or trying to shirk responsibility will only decrease your chances of getting approved. Describe on the application the circumstances of the repossession. Gather all important documentation ahead of time – pay stubs, driver’s license, utility bill, proof of insurance, etc. Preparation is a sign of responsibility, and that will sit will with a potential lender.
Lastly, make sure your prospects are reasonable and easily affordable. Stay on the safe side, and you’ll avoid another catastrophe in the future. For more credit repair help, check out our list of tips, tricks, and credit resources.