It is a challenging time for world economies as most are faced with unprecedented unemployment levels, poor job prospects, and increasing inflation rates. In times like these, even individuals who enjoyed great credit and had a positive track record of bill payments, are now faced with the fear of defaulting on existing loans. Most borrowers find the monthly budgets going for a toss especially if there is a personal/car loan over and above a home loan. 

Loan defaults are the last thing on a borrower’s wish list. A loan default not only hampers credit history but also there are chances of losing the asset to the lender. So, what are the chances that your asset will be repossessed? How long does it take for this kind of situation to arise? Let’s understand repossession and how long it takes for it to stop impacting your credit report. 

Understanding Loan Defaults

A loan default takes place when a borrower fails to make repayments to the lender on time. The next question that arises is, is there a certain number of payment failures stated to be considered as default? Yes. 

In a normal scenario, the loan agreement signed between the borrower and the bank will have specific terms laid out. It has details of the loan, repayment structure and situations which will be considered as default are mentioned. It may also have details of the total risk involved and solutions to consider in case of a default.

The term 'default' does not have a universal definition and it differs from case to case. In general terms, a loan is classified as default when the loan repayment is 90 to 120 days late. A borrower needs to know about the repercussions of loan default and the possible remediations for the same. A loan default can mean big trouble for any borrower as there is a possible impact on the credit score and the borrower can be tagged as ‘risky’ by lenders. 

How long does repossession stay on your credit report?

When a lender forcefully takes away a borrower’s vehicle/other asset it is called as repossession. This is done when a borrower fails to make timely loan repayments as per contract agreements. It’s a common practice for lenders to retain a spare key of the vehicle till the car loan is paid in full. 

Normally, repossession cases have a direct impact on a borrower’s credit score. Such situations get reported and stay on the credit report for a substantial period. In some cases, it could stay on for up to seven years. 

A credit report will also have other dates mentioned, such as date of opening of the account, closing date of the account, last payment or activity date, date of the last update made by the lender. The information on dates included in a credit report does not impact the repossession credit remark or the timeline till when it will stay on the report.

How does repossession affect your credit score?

A borrower’s repayment history has a heavy influence on his/her credit score. Lenders gauge the possibility of timeline future repayments by going through an individual’s track record of managing credit accounts in the past few years.

A repossession is like a negative mark on the credit report of a borrower. It has a significant negative impact on one’s credit score, almost to the extent that the borrower may not qualify for fresh credit. In case he/she does qualify, there are chances of higher interest rates being imposed and fees for compensating against the additional risk that the lender is willing to take by lending credit.

For example, if the report states that the borrower’s vehicle had been repossessed, it indicates that he/she stopped making loan repayments and the lender took possession of the vehicle to recover the debt owed by the individual. While repossession is often the last option tried out by the lender, it has a significant impact on the credit report.

How to rebuild your credit after a repossession?

For any borrower who has had a repossession history, rebuilding of the credit score may take a long time. But there is no reason to delay building a good credit score. Here are some helpful tips for the same:

  • In case you are lagging with payments on any existing loan accounts, try to catch up on repayments till your account is clear of any past-due amounts. This can be a positive first step in rebuilding your credit scores.
  • Ensure to pay off all outstanding debts. Paying off any outstanding debts will help in improving your credit score. Check for any balance that is left on the repossessed account in case the lender has encashed the vehicle for recovering the balance loan due. In case an account has past-due payment history, it can be considered negative. However, future lenders could be willing to extend credit in case you reflect consistently good credit behaviour over the course.
  • Try to ensure that you make timely repayments going forward. For any open credit accounts, all payments must be made on time, each time. This is because lenders often look for your recent payment history. The more time it has been since your delinquencies, the lesser impact they can have on your credit records. All the recent positive payments will be seen in your scores and these can help in eliminating the negative impact of past delinquencies.

Final Thoughts

Making timely payments towards car loan EMIs is important to ensure while maintaining a good credit history. If you are unable to do so, try to communicate openly with your bank or lending institution. With negotiations, there could be certain arrangements made for easing your loan burden. Sometimes, lenders may allow you to temporarily stop or delay a few payments. Alternatively, you can also negotiate for easing of the repayment schedule. All these measures will allow you to continue making repayments at your own pace and maintain a good credit track record instead of getting entangled in a repossession loop.