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.)
Credit Problems
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