When a lender repossesses your car, it can significantly lower your credit score and make it difficult for you to qualify for credit cards and loans in the future. If you find it challenging to keep up with car debt, it's best to mitigate your risk as soon as possible by speaking to the lender and exploring your options.

If you’ve lost ownership of your vehicle, we’ll provide you tips on how to fix credit after car repossession through strategies like paying off your debts, making timely payments, and getting a credit builder loan.

What Is Car Repossession and How Does It Work?

When you take out an auto loan, the lender holds the vehicle’s title until you pay off the loan. Your lender can start the repossession process if you default on the loan and fail to make payments as agreed. Your loan contract will mention the specifics of when default occurs, which is usually 60 days after a car loan payment is due.

Each state has different repossession laws, and in many states, lenders need to notify you in advance if they’re going to repossess your car. Lenders also can’t “breach the peace” through physical force or property damage.

Once the car is repossessed, the lender can sell it to recover the outstanding amount. If they’re unable to cover your debt as well as other costs related to the repossession, you’re liable to pay the deficiency balance.  

How Does Repossession Impact Your Credit Score?

A repossession will stay on your credit report for seven years from the date of default and will continue to have an impact on your credit score during that time. While there’s no way to tell how many points your credit score will drop, it’s important to know that other than the repossession, your credit score may take multiple hits during the process for late payments, collections, defaults, and court judgments.  

The impact of a repossession is usually substantial, but its impact lessens over time. However, you may find it difficult to qualify for new credit, and if you do, you’ll usually pay a higher interest rate.

7 Steps To Fix Your Credit After Car Repossession

Below is our step-by-step guide on how to fix credit after a car repossession. Keep in mind that fixing your credit takes time and a lot of consistent effort.

1. Review Your Credit Reports

Checking your credit report after an involuntary repossession is important to understand the extent of damage. This will also allow you to ensure that the information on your credit history is accurate. You can get a free credit report from all three major credit reporting bureaus (Experian, Equifax, and TransUnion), and disputing any errors on them can help improve your credit score.

2. Create a Budget

If you don’t already have a budget, start by creating one so you can manage your finances better. A budget will help you improve your financial stability and avoid future credit issues by giving you a true picture of your income and expenses.

Track all your expenses and find areas where you can cut spending. If you have any extra money available at the end of the month, create an emergency fund and make extra payments on your debts.

3. Settle Outstanding Debts

If you have any other debt obligations, such as credit card debts, other car loans, or personal loans, save money to pay them off. Clearing any debts under your name will allow you to improve your credit score.

If you have multiple high-interest debts, consider taking out a debt consolidation loan to streamline monthly payments. If you have a lot of unsecured debt, another option is to work with a debt settlement company to settle it for up to 50% of the total debt enrolled.

4. Negotiate With Creditors

If you have any other past-due accounts, negotiate with your lenders for favorable repayment terms or a payment plan. Past-due accounts can stand in the way of rebuilding credit, so it's important to resolve them as soon as possible.

If you can’t repay the full amount you owe, consider debt settlement, which will allow you to settle your account for less than you owe. You may be able to save as much as 50% on the debt.

5. Build a Positive Credit History

While you can’t remove a repossession from your credit history, there are steps you can take to lessen its impact. Follow these tips on how to fix credit after a car repossession:

  • Pay all your bills on time. On-time payments account for 35% of your FICO score, so make it a priority to avoid a single late or missed payment.
  • Use max out your credit limit. Lower your credit utilization ratio to under 35%, which is ideal.
  • If you have a lot of debt, start paying off the loan balance.
  • Monitor your credit reports and dispute any errors you find with the credit bureaus.
  • Diversify your credit sources. Use a mix of revolving accounts and installment debt.

6. Consider Becoming an Authorized User

Another way to rebuild your credit is by becoming an authorized user on someone else’s credit card. As an authorized user, you can use the card for purchases and then pay off the balance at the end of the month. This will help you establish a positive credit history.

7. Get a Secured Credit Card or Credit Builder Loan

If you’re unable to get approved for a regular loan or credit card, consider applying for a secured credit card or credit builder loan. Both of these products are available to borrowers with no or poor credit history. The goal is to borrow money and make timely payments to demonstrate that you’re a responsible borrower.

Where To Get Help For Credit Repair

If your situation is complex or if you think you need to consult a professional on how to fix credit after repossession, there are several resources available. Here are a few options to consider:

  • Many companies offer credit repair services and programs that can help you correct a poor credit score.
  • Credit counseling agencies can provide you with guidance and education so you can manage your debt better to improve your credit score.
  • You can also fix your credit by yourself through strategies like disputing errors on your credit report and negotiating with collection agencies.

Take Action To Fix Your Credit After a Car Repossession

While it's important to know how to fix your credit after a car repossession, you must remember that rebuilding your credit takes time. You can’t remove a vehicle repossession from your credit report if it’s accurate, but you can start taking action to lessen its impact by paying down debt, making timely payments, and using credit carefully.

“Understand that for the next few years, you'll likely have to purchase a car with cash, borrow money from friends or family, or take out a very high-interest loan,” explains Teresa Dodson, a debt expert and the founder of Greenbacks Consulting.

It's equally important to explore resources and learn strategies to manage your debt better in the future so you can avoid late payments, repossessions, and other negative dings to your credit report.