One of the most undesirable consequences of defaulting on a loan is repossession. Losing a vehicle or other significant item can put you in a bind.
However, sacrificing a piece of property may only be the start of your worries. A repossession also has consequences for your credit.
What happens to your credit after a repossession?
Any delay in payment can hurt your credit score. However, lenders do not typically report late payments to the credit bureaus until you are 30 days behind. The repossession process usually begins 60 days after your missed payment due date.
Derogatory remarks have a high impact on your credit score. The credit bureaus check for defaults and any accounts that go to collections. These agencies also review public records for items such as tax liens, civil judgments and bankruptcies.
Payment history affects about 35% of your score and stays on your record for seven years, affecting the terms you can get on future loans.
What can you do to avoid repossession?
When financial problems arise, it is usually better to communicate with the lender and try to devise an arrangement to prevent late payments or repossession. You may be able to negotiate a deal that minimizes the harm to your credit score.
A lender may be willing to adjust the payment plan or offer to refinance. Others will allow a deferment, where you can skip a payment or two while you put your finances in order. You will still have to pay the necessary amount at a later date, possibly at the end of the loan.
A repossession has long-lasting effects on your credit report that takes years to undo. While surrendering a piece of property is sometimes inevitable, you can investigate your options to determine which action suits the circumstances.