If you fall behind on your auto loan payment, your lender may repossess your car. That means the lender can seize your vehicle to recoup some of the money it loaned you.
The bad news? It’s a double whammy. You no longer have a vehicle, and repossession can hurt your credit score. The good news? You may be able to get your car back, either by reinstating your car loan or through a process called redemption.
Here’s a look at the difference between these two strategies and how to know which, if either, is an option you can pursue.
Key Points
• Reinstating a car loan after repossession requires paying all past-due amounts and fees.
• Lenders may offer a reinstatement period, allowing borrowers to catch up on payments.
• Reinstatement can prevent the car from being sold at auction.
• A credit score may still be negatively impacted by the repossession.
• Communication with the lender is crucial for understanding options and requirements.
How Car Repossession Works
When you take out a loan to buy a car, your lender will typically use your vehicle as collateral to secure the loan. That means that your lender has the right to take the vehicle away if you miss payments and default on the loan, also known as car repossession. The lender will usually sell the vehicle at auction in order to recover some of the money it loaned you.
Your loan contract will specify terms for repossession, defining what it means to default on your loan and laying out the consequences. In some cases, defaulting may mean missing just one payment. However, your lender will likely warn you that you’ve missed a payment and try to collect before repossessing your car. If the lender fails to collect and you’re in default, it can come and take your vehicle at any time and without warning.
Your car can also be repossessed if you fail to have proper insurance for your vehicle. Because your lender uses your vehicle to secure your loan, it has a vested interest in protecting it. If you allow your auto insurance policy to lapse, your lender may view that as a risk and use it as a reason to repossess your car.
What Is Reinstatement?
Reinstating your car loan is when you can make up any overdue payments, including covering the costs of the car repossession, and get your vehicle (and your loan) back after it’s been repossessed.
Reinstatement essentially restores the loan to its original state, allowing you to resume making payments on it as normal.
How Reinstating a Car Loan Works
If your car has been repossessed, all is not lost. You may be able to get it back by reinstating your loan.
Typically, you do this by bringing your loan up-to-date with a lump-sum payment that covers all past due payments, fees, and late charges.
Your right to reinstatement might be built into your loan contract, or state law may require your lender to allow it. To find out if your state allows reinstatement, contact your state attorney general’s office or the state consumer protection agency.
If reinstatement is allowed through your loan agreement or state law, you can contact your lender to request a reinstatement quote, but do so as soon as possible. Your lender is then required to send you a notice within 15 days with the amount necessary to make your loan current. But be ready: At that point, you may have as little as 10 to 15 days to reinstate your loan at that amount.
Note, too, that if the terms of the reinstatement notice aren’t feasible for you, your lender may be willing to negotiate.
When You Can’t Reinstate an Auto Loan
If your loan contract or state doesn’t specify your right to reinstate your auto loan, you may have to seek other options, such as redemption.
What’s more, be aware that even if you do have the option of reinstating your auto loan, you have only a limited amount of time to do so.
And if you don’t pay the necessary amount to bring your loan current under the terms of your reinstatement notice, or if your car is sold, you may forfeit your right to reinstatement.
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When Redemption Is an Option
If you can’t reinstate your loan, another option may be loan redemption. When you redeem your car, you buy it back from your lender in a lump-sum payment. That likely will be more expensive than reinstating your loan, but it is more likely to be an available option.
Every state allows some form of redemption, and you typically can exercise this right until the lender sells the car. State laws differ in how long a lender must hold on to a car before selling it, how the lender can sell the vehicle, and how the lender has to notify you of your right to redeem.
Bear in mind that redeeming your car can be a costly process. You may have to cover costs, such as repossession expenses, towing charges, attorney’s fees, and late fees. As with reinstating your loan, the terms of redemption may be negotiable.
Reinstatement vs. Redemption
The following chart summarizes some of the differences and similarities of reinstatement and redemption.
| Redemption | Reinstatement | |
|---|---|---|
| Right to Execute | Every state allows some right to redemption. Laws may differ on how long lenders must hold a vehicle, how they can sell it, and how they must notify you of your right to redeem. | Reinstatement is not always guaranteed. Your auto loan contract may allow it, or state law may require your lender to offer it. |
| Cost | You must make a lump-sum payment that covers the balance of your loan, as well as fees and penalties. | You must make a lump-sum payment that covers your back payments and any other fees or penalties. |
How Long Does a Repossession Stay on Your Credit Report?
An auto repossession typically harms your credit report and will likely remain there for seven years. Like bankruptcies and collections accounts, repossessions are serious red flags for lenders if you are seeking credit in the future.
What’s more, failing to pay your auto loan on time can have its own negative impact on your credit score. Your lender can report you as delinquent on your loan for each month your payment is 30 or more days past due. This, too, can drag down your credit score, potentially for years to come.
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The Takeaway
When your lender repossesses your car, it doesn’t necessarily have to leave you stranded. Reinstatement and redemption provide options for getting your car back, though the process can be costly.
It’s generally far better to avoid repossession in the first place. If you find your auto payments are becoming untenable, consider refinancing your auto loan to help make your monthly payments easier.
Refinancing before you fall behind on payments typically has a minimal effect on your credit score. Note that refinancing after a repossession can be difficult.
Another option that may be available to you is to trade in your vehicle for a less expensive car with cheaper payments.
If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.
FAQ
What is redemption?
Redemption is the process by which you buy back your repossessed car, paying off the balance of your loan and any other fees and penalties.
What is reinstated repossession?
Reinstated repossession occurs when you pay off your past due auto payments, fees, and penalties to restart your auto loan.
Why might you choose to redeem your car?
You may choose to redeem your vehicle if reinstatement is not an option, your loan is nearly paid off, you have equity in the car that you don’t want to lose, or you want to lessen the effects of repossession on your credit score.
Why might you choose to reinstate your loan?
You might reinstate your loan for many of the same reasons that you would choose to redeem your car, including if your loan is nearly paid off, you have equity in the car that you don’t want to lose, or you want to lessen the effects of repossession on your credit score.
What do you need to do to redeem?
Notify your lender immediately that you want to redeem your loan, negotiate the terms of the agreement, and make your payment within the specified period.
What do you need to do to reinstate?
Find out if your lender or state law allows reinstatement. If so, notify your lender immediately that you wish to pursue it. Negotiate terms if necessary, and make all payments swiftly, within the specified time period.
Photo credit: iStock/welcomia
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