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Some loans are secured by collateral. This is something that
is designated to be taken by the creditor in the event that the
customer defaults on the loan. The most common loans like this
are mortgages and car loans.
With a car loan, the creditor will place a lien on the car, and will be listed
as lien-holder on the title and registration. This legally establishes
the car as collateral for the loan, and gives them the option to seize
the car without a lawsuit.
If the customer becomes delinquent (gets behind on payments) on a car loan,
the creditor (a bank, car dealer, or finance company) can repossess the
car. A repossessor will arrive at the customer's home, and simply take
the car. S/he may bypass or pick the locks, or may have regular keys.
Repossessors are not allowed to break into a locked garage, by may come
onto to customer's property (driveway, carport, etc.) They can arrive
at any time, day or night. The primary restriction on their behavior is
quite vague: the may not "breach the peace."
Sometimes a car-purchaser will realize that
s/he cannot afford to continue making the payments, and will voluntarily return
the vehicle back to the creditor. Unfortunately, this will still be listed
as a repossession on the consumer's credit records (a seriously negative
item), and there may still be further liability. It is not as simple
a "walking away from it."
Cars, especially new ones depreciate (become less valuable) very quickly.
A new car may suddenly lose $2000 in re-sale value the moment you drive
it away from the dealer. Also, during the early part of the repayment
period, most of the payments are consumed by interest charges, so the
consumer's equity will grow very slowly. The loan often becomes greater
than the resale value of the car.
Repossessed cars are typically sold quickly
and cheaply at auctions, for amounts that will not cover the balance owing
on the loan. The difference between the actual sale price and the higher loan
balance is known as the "deficiency", and the consumer who defaulted
on the loan is liable for this amount. The creditor
may then file a lawsuit and obtain a "deficiency judgement" and
go after the consumer's other assets, such as bank accounts, and may garnish
his/her wages. This can happen even if the consumer had voluntarily returned
the car.
If you are delinquent (or are about to become so) on vehicle payments
and are facing imminent repossession, you may be able to protect your
credit rating by finding another person to take over the loan (with approval
from the creditor.) You will have to give up the car, but will lessen
the resulting credit damage (although there may still be late payments
showing on your credit files.)
