Repossession can be the result of defaulting on a loan. It happens with those loans that involve collateral – for example, auto loans. When you take out a secured loan, the lender or a financial institution claims the ownership of the asset, which can be your car, property, and the like.
Unless you repay the whole of the debt, the title of the asset cannot be passed over you. In case you fail to settle the debt, the lender will repossess the asset and liquidate it to get their money back.
Repossession does not aim at retaining your vehicle – in fact, it is used to ensure that the debt is paid off. If you have borrowed money, you have to stick to the repayment plan. Even a single time default can lead to repossession.
Lenders do not have an interest in your asset. Therefore, they would like to remind you to make the payment as soon as possible. However, if the default continues, they will take the asset in their custody to liquidate it.
Most of the time, repossession takes place when it is evident that the borrower is not going to make payments on time. Suppose you have taken out car finance with no guarantor with a direct lender, and you are having difficulty keeping up with payments. The lender will send you reminders, but they will repossess your car if you do not turn to them.
What are the types of repossession?
There are two types of repossession when you fail to pay your debt on time – Voluntary repossession and involuntary repossession.
Voluntary repossession occurs when you willingly hand over the asset to the lender. Since you are doing it yourself, it shows that you want to resolve your debt. This generally happens in those cases where borrowers find it hard to keep up with repayments because of unexpected financial problems.
Involuntary repossession occurs when you are making default on your loan payments constantly and not responding to the messages and emails sent by the lenders. This reckless behaviour forces the lender to send repossession agents to take the asset into custody.
Involuntary repossession does not mean that the repossession agents will barge in your house, use threat and violence. It means that the lender does not need to express their wish and see your permission to do so.
In some cases, it can happen right after the first-time default. Note that a repossession agent cannot use threat and violence to seize your asset. You can call the cops otherwise. This is entirely illegal to breach the peace. Violent repossession is not permitted at all.
How can repossession affect your personal finances and credit score?
Well, whether it is voluntary or involuntary repossession, it can take a toll on your personal finances. You have not considered free from debt even after the seizing of your asset (car in case of an auto loan).
You will be liable to pay down the balance that remains even after the liquidation of your car. Further, repossession can harm your credit score. It can prevent you from borrowing money at affordable interest rates.
Your lender will report to the credit reference agencies of repossession. It will show up on your credit report for a very long time – up to seven years. It means that you will not be able to borrow money at affordable interest rates down the line.
However, most lenders will hesitate from lending you money. Well, you can take specific steps to improve your credit score. However, it will take some time certainly.
Tips to avoid repossession
Even though you can improve your credit score, your first priority should be avoiding repossession. Here is how you can do it:
- Make a budget for the loan repayments
Budgeting can help you stick to your repayment plan. Since you know, you are to pay down a fixed payment every month, set that chunk of money aside as soon as you receive your paycheque and try to meet all of your expenses with the left money.
Make sure that you do not touch the money put aside for loan repayment. If it is challenging to meet all of your expenses with the balance, look over your monthly expenses and see where you can cut back. If you still have a problem, you should try to live off a lean budget.
- Plan carefully
When it comes to buying a car or a house, you need to ensure that you will manage your debt repayments. Use online calculators to see the total cost of the debt and the size of monthly repayments. It will give you an estimation of how much you will likely pay.
Make sure that your job is secure so you do not struggle to pay down the debt. Try to have a backup plan if you lose your job or come up with a financial problem.
You should research the market for better interest rates. Talk to lenders and ask how much it can cost you. Then compare it with your budget to check if you can manage to pay off the debt.
- Build an emergency fund
Do not compromise with your emergency cushion, no matter how strong your financial condition is. Financial emergencies can pop up any time, and therefore, you must have some money stashed away to dip into.
This money can help you tide over without dipping into the money you need for the loan repayment. Try to build a large emergency corpus to help you make repayments even if you lose your job.
The bottom line
Repossession can badly affect your finances as well as credit score. It can occur when you fail to pay off the debt. It is essential to check your affordability before borrowing money and have a backup for financial emergencies.
Carefully assess your finances and have your credit score well. The rule of thumb is making a budget, building an emergency cushion, and planning large expenses.
