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- Note: If repossession agents attempt to use threats, violence, or damage to your property as a means to seize your assets, you should call the police. It’s illegal to breach the peace while repossessing assets, and state law protects borrowers from violent repossession (though the exact laws vary by state). In that case, you may be eligible to sue.
Both voluntary and involuntary repossession can wreak havoc on your personal finances. Just because your asset has been repossessed does not mean your debt is resolved (unless otherwise stated by the lender). You may still owe the balance that remains after the repossession of your property has been accounted for.
Plus, on top of depriving you of your asset (usually it’s something large and important — like your car), repossession also harms your credit score.
How Does Repossession Impact Your Credit
Once repossession has happened, and you’ve lost your asset, the trouble is far from over, unfortunately. Lenders can report the fact that you’ve had an asset repossessed to the credit bureaus responsible for determining your credit score.
Why does this matter? Your credit score is essentially a measure of how trustworthy lenders consider you. The higher the score, the more trustworthy — and the easier it is to get a loan with a low-interest rate. If you have a low credit score, it can be difficult to secure financing in the future, and if you do, rates are likely to be high.
According to Debt.org, repossession stays on your credit score for about 7 years. While the amount of harm it does to your score diminishes over time — especially if you practice healthy lending habits following the repossession — the ding to your credit won’t be completely removed for 7 full years following the date you were first delinquent on your loan payments.
The good news is that poor credit is not permanent. There are steps you can take to raise your credit score. However, this can take time, making it important to avoid repossession in the first place if that’s possible.
How to Avoid Repossession
Once you’ve already become delinquent or defaulted on a loan, avoiding repossession can be difficult. After all, depending on the terms of the contract you signed, your lender might be perfectly within their rights to repossess your asset once you have been delinquent for a certain amount of time.
That’s why the best way to avoid repossession is to practice healthy financial habits before it becomes an issue. Here’s what to focus on:
- Budget for your loan payments
Budgeting can be a challenge if you’ve never really done it before. Mint makes it easier. Instead of wondering where all your money goes at the end of each month, you can cleverly plan your spending, track purchases, and ensure that you’re on track.
This can help you with paying off debt, so you don’t risk becoming delinquent on a loan, falling into default, or risk repossession. Sometimes, all it takes is a little careful financial planning to stay on top of your various responsibilities.
- Plan ahead before purchasing
Of course, all the planning in the world won’t help if you just don’t have the cash to make your payments. Before choosing to finance a large purchase — like a car or home — it’s important to plan carefully ahead of time.
When discussing financing with possible lenders, be sure to get an estimate for how much your monthly payment will be, as well as whether that payment is fixed or variable. Then, when you get a sense of what you’ll be responsible for, factor it into your monthly budget to see whether completing payments will be a strain on your finances.
- Build an emergency fund
Of course, if you lose your job, or suddenly have other unavoidable expenses come up, having a backup plan is essential. Most experts recommend saving about 3 to 6 months’ worth of your income in an emergency savings account, just in case something goes wrong. That way, even if you lose your job, you’ll still have cash on hand to prevent repossession and other financial disasters.
- Work with trusted lenders
Lastly, not all lenders are the same. Some may jump to repossess your assets as soon as you miss a payment. Others are more lenient, and may allow you a grace period before pursuing more serious and aggressive ways to collect on your debt. Carefully research and review lenders before committing, that way, if there is a problem and you miss a payment, you know you don’t have to immediately panic.
Note: Certain military service members are also protected from repossession by current laws. If you are in the military, you may have other options to avoid repossession.
Key takeaways
Be sure to keep this information in mind before you go:
- Repossession occurs when a lending agency or bank seizes assets in order to satisfy (or partly satisfy) an outstanding, unpaid debt.
- Repossession can be voluntary or involuntary. If it’s involuntary, it’s good to know your rights. For example, repossession agents can not use violence or threats to reclaim your things.
- Repossession can also damage your credit, and may take as long as 7 years to be completely removed from your credit history. However, by practicing careful finances in the meantime, you can improve your credit score.
- The best way to avoid repossession is to budget carefully, plan your large expenses, build up an emergency savings, and work with trusted lenders.
Repossession may seem like a nightmare, but it can be avoided with the right steps. Be sure to know your rights, work on your financial wellbeing, and plan ahead to avoid the worst of repossession.
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