How a car repossession affects your credit

If you're behind on car payments and peering through the curtains for the repo man, you should know a vehicle repossession could drive your credit into the ground. But you might be able to put on the brakes.

"You can stop a repo," says Kimberly Schenk, who, along with her husband Richard, runs Northern Asset Recovery, a northern Michigan repo company.

But many consumers who are scared, embarrassed or simply not sure what to do, ignore calls and letters from the bank, which is the wrong move.

"The key is to communicate with the lender," Schenk says.

A repo will tank your credit

If you want to salvage your credit, you've got to steer clear of a repo, says Wayne Sanford, a credit expert and owner of New Start Financial, a Texas credit consulting company. "A car repo is very damaging to your credit," he says.

Here's how repo can hurt your score:

• Late payments. A lender can repossess your vehicle only after you've defaulted on the loan -- the specifics will be spelled out in the contract you signed when you got the loan for your car, van or truck, according to the Federal Trade Commission's guide to vehicle repossession. By the time your car gets seized, at least one 60, 90 or 120-day late payment has likely been reported to the credit bureaus. Payment history accounts for 35 percent of your FICO score, and the later the payment, the worse it is for your score, according to myFICO.com.
• The repo. A repossession will show up on your credit report under "current manner of payment" for the loan, according to TransUnion Credit Report User Guide . A code 01 means paid as agreed, while code 08 indicates a repossession, and 8A a voluntary repossession. A voluntary repo, where you hand the vehicle back over to the lender, is just as bad for your credit as getting your car grabbed by a repo agent, says Kevin Heupel, a Colorado bankruptcy attorney and debt relief expert. Both put a serious blemish on your credit, he says.
• A collection. After repossession, the vehicle likely will get sold cheaply at an auto auction. In many cases, especially if you've been making car payments for less than two years, the sale price will be lower than the total you owe on the loan. That's called a "deficiency balance," Sanford says. So, if your loan balance is $17,000 and the car sells for $12,000, you owe $5,000, Sanford says. Then the lender might tack on as much as $1,500 extra in towing and storage fees, he says. "They usually want a lump sum, so most people can't pay," Heupel says. If the lender sends the account to a collection agency, it can show up on your credit as a collection, which also has a serious negative effect on your credit, especially if it's recent.
• A judgment. If the creditor sues you to try to collect the deficiency balance and gets a judgment against you, that shows up in the public records section of your credit report, also a serious black mark.

In all, a repo could cause a 100-point drop in your credit score, Sanford says. And late payments, collections and public records generally all stay on your credit for about seven years, according to myFICO.com.

A repo not only damages your credit score, it sends up a huge red flag to auto lenders that could easily prevent you from financing another car, Sanford says.

The nuts and bolts of a repo

Once you're more than 10 days late with a payment -- a typical grace period for auto lenders -- your phone will start ringing at least once a week, Sanford says. "In month two, obviously they're going to start picking up the phone calls," he says.

Most large banks won't repossess a car until you're 90 days or more late on a payment, Sanford says. The time frame varies by lender, though, and some will repo your ride after 60 days, he says.

If you think that means a burly man will show up to bang down your door and yell at you at 2 a.m., you might be watching too much TV. In "Operation Repo," a reality show that ran on TruTV for years, tattooed tough guys muscled their way onto parking lots, chased consumers on foot and tackled those who refused to hand over the car keys.

"Everyone thinks it's like TV and it's not," Richard Schenk says. In real life, repo agents can't cause a "breach of the peace" and also have to follow state law, according to the FTC. In many states, that means they can't use physical force, threaten you or break into your garage to get the car.

A typical repo happens quietly and quickly, Richard Schenk says. The Schenks drive their pickup, outfitted with a lift, to the borrower's home or work. Once they spot the vehicle and confirm it's the right one by checking the VIN, they load it onto the lift, Richard Schenk says.

"I can pick up a vehicle and go in about 30 seconds," he says.

After securing the vehicle, though, the Schenks say they usually give the consumer a chance to get their handbags, CDs or other personal items out of the car. In fact, a creditor can't keep any of your property left in the car and, if they do, you should talk to a lawyer, according to the FTC.

The Schenks operate in a small community and work for many local credit unions, so they say they try to talk to the consumer to make repos as painless as possible.

"We take a pretty compassionate approach," Kimberly Schenk says.

How to steer clear of a repo

No matter how nice the (or scary) the repo agent, no one wants to have their car taken back by the bank. If you're on the road to a repo, you might be able to make a U-turn to save your credit and your car. Here are three options:

1. Ask for a deferment. Banks don't want to repossess your car, Heupel says. "They know they're not going to get top dollar for it," he says. Many lenders will grant you a deferment if you're not already late paying on your loan, Heupel says. Most banks allow one deferment of one to two months per year, Sanford says. So, say you have 30 months left on your loan. The bank would offer to let you skip the next two payments and tack them onto the end of the loan, he says. In some cases, the bank might require you to make half of your next payment as a show of good faith, then let you skip the following month altogether. "If cash is tight, that's a little trick that allows you some breathing room," Sanford says. If the bank agrees to make any changes to the loan, get it in writing, the FTC recommends.

2. Refinance your auto loan. If you still have good credit, refinancing your loan might be a good choice. You may be able to reduce your monthly payments by either lowering your interest rate or stretching out the term of your loan. And you might be able to take a month off from payments in between loans, according to Wells Fargo.

3. Sell the car on your own. Or, you could try to sell your car on your own. However, if you're "upside down" on the loan, meaning you owe more than you can get for the car, you'll have to find a way to come up with the difference, such as borrowing from family or friends, to repay the entire balance of the loan. You'll need to pay the loan in full to get the bank to release its lien on the car so the buyer can get the title.

"At the end of the day, that's a lot better than getting your car repossessed," Sanford says.

See related:Surprise! Many credit card agreements allow repossession , Court judgments for debt: Your options after the gavel ,

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.