A Guide to Auto Loans After Repossession
Getting a new auto loan after a repossession is challenging but not impossible. It might be better to restore your credit first.
Written by Drew Waterstreet
Reviewed by Jessica Barrett
Table of Contents
- How do auto loans work?
- What makes it difficult to get an auto loan after a repossession?
- How to get an auto loan after a repossession?
- Save on car insurance with Jerry
- FAQs
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Vehicle repossessions have substantial negative impacts on your credit score, making it difficult to secure a favorable auto loan in the future. While it might be difficult, it is not impossible to find a lender who will work with you.
Sufficiently understanding your financial situation is key to ensuring you don’t end up with another car repossession—make sure you don’t rush into another auto loan.
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How do auto loans work?
An auto loan is a financing plan that helps you drive a vehicle directly off the dealership lot. A bank or credit union will front the money to the dealership and you will pay them back over an agreed-upon amount of time—plus interest, of course.
Auto loans take into account the down payment,
interest rate
, and term lengths. This legal agreement designates how much you will pay back to the lender over the tenure of the loan. You do not own the vehicle’s title outright until the loan is completely paid in full.This is where repossessions come into play. If you
fail to keep up with monthly payments
, the lender has the legal ability to take the car back and even sell it as compensation for your unpaid loan. You can still be on the hook for outstanding debts, even after a repossession.Key Takeaway Failing to fulfill the terms of your loan agreement can result in vehicle repossession.
What makes it difficult to get an auto loan after a repossession?
Creditors do not view repossessions kindly and they tend to serve hefty penalties towards your credit score. In their eyes, a vehicle repossession represents an inability to pay back debts effectively.
A vehicle repossession will drop your credit score anywhere from 50 to 150 points and will stay on your credit report for seven years. Depending on where your credit score was to begin with, this could drastically impact your ability to qualify for a loan with favorable terms. You can find out more information about loans and credit scores here.
This all sounds very doom and gloom, but there is some hope. The drop in credit score may be less severe if you accept a voluntary repossession—ask your lender about this option if you’re feeling under pressure to make payments on time.
Also, your credit penalty is retroactive to the repossession date, so it will incrementally improve over time. The penalty does not hold its weight for the entirety of the seven years.
Key Takeaway Auto repossessions negatively affect your credit score, making it difficult to get favorable loan terms while it remains on your credit report.
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How to get an auto loan after a repossession?
It is still feasible to qualify for an auto loan after a repossession—but is this the right move for you? Let’s find out.
Take stock of your credit and finances
After a vehicle repossession, it’s important to take a step back and review your monthly finances. An important metric to analyze is your debt-to-income (DTI) ratio. You can calculate this by taking your monthly debt payments and dividing them by your gross monthly income.
Most auto lenders cap DTI at 50% for you to qualify for a loan. If your monthly spending habits don’t align with this, it’s important to make adjustments before you hop into another auto loan.
Next, you’ll want to understand where your credit score ended up after the vehicle repossession. It may be a financially responsible move to improve your credit score before applying for another auto loan.
Since credit scores have a substantial impact on the interest rates you qualify for, this strategy can save you money in the long run.
Here are some basic tips to lower your credit score:
- Pay debts on time
- Stay within your credit limit
- Don’t apply for new credit lines
If all this sounds confusing, it’s best to discuss your qualifications with a trusted financial advisor.
Consider a loan from an alternative source
After you’ve thoroughly reviewed your financial bandwidth, you can explore alternative options for an auto loan. Not all lenders will accept applicants with a bad credit history, so you may have to be flexible.
Alternative sources that tend to be more lenient are credit unions, sublime lenders, and buy-here-pay-here (BHPH) dealerships.
But beware, just because you qualify for a loan doesn’t mean you should take it. Sometimes subprime lenders will have you agree to terms that only make your situation worse. It’s best to get quotes from multiple trusted sources.
MORE: How to get a car loan from a credit union
Get preapproved before you shop for cars
Getting preapproved may not reveal the numbers you’re looking for after a vehicle repossession, but it will tell you how much you can afford. This will help you stay within your budget.
Being upfront and honest about your credit history by getting preapproved may also grant you some leniency with your new lender.
Consider a co-signer
Using a co-signer could allow you to bypass issues with your credit score. If someone you know with a good credit score is willing to put their name on the loan, you could still qualify.
Keep in mind that this means that they will be held liable for any debts that you fail to pay.
MORE: How to get a cosigner for a bad credit car loan
Sometimes it’s better to wait
Sometimes it is truly better to wait before rushing into a new loan after a vehicle repossession. Taking time to reassess and improve your financial situation could save you a substantial amount of money in the long run.
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FAQs
Can I get an auto loan after a repossession?
You can get an auto loan after a vehicle repossession but finding a loan with a favorable interest rate may be challenging.
How much will a repossession affect my credit score?
A vehicle repossession will deduct 50 to 150 points from your credit score. Accepting a voluntary repossession may slightly mitigate this deduction.
How long does a repossession stay on my credit report?
A vehicle repossession stays on your credit report for seven years, but its negative effects begin to diminish as the years go by.
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