As the economic slump continues, many people are struggling to make ends meet, and unfortunately, vehicle repossessions are now on the rise. The number of repossessed vehicles jumped 12 percent to 1.67 million nationally in 2008 and is expected to increase by another 5 percent this year, according to Manheim Consulting which publishes a monthly Used Car Value Index for financial institutions.
“The worst thing you could do when falling behind on a car payment is to bury your head in the sand and ignore the problem,” said Tim Burns, Better Business Bureau (BBB) spokesperson. “Having a vehicle repossessed not only hinders your mobility, it also jeopardizes your ability to get loans or credit cards for up to seven years because of the negative impact on your credit rating. To prevent repossession, and the negative effect on personal credit scores, automobile owners have to take responsible action and face the issue head on.”
As if car owners didn’t need another reason to avoid the repo man, if a lender chooses to sell the car at auction, and it is bought for less than the outstanding loan, the original owner may still be on the hook to pay it back in addition to added fees—essentially paying for a car they no longer own.
The difference between what is owed and what the vehicle resells for is called a “deficiency”. Deficiencies can also include the costs incurred involving the repossession of the car. A lender can sue someone who defaults on a loan to reclaim the deficiency amount. A deficiency judgment could also lead to future garnishments of pay checks, bank account, or tax returns if the original car owner doesn’t make voluntary payments to pay off the debt.
BBB recommends car owners consider taking the following steps when falling behind on car payments:
Contact your lender. According to the American Financial Services Association (AFSA), auto repossessions cost creditors about $8,000. Therefore, the best case scenario for both you and your lender is to keep you in your car and making payments. To that end, lenders will often work with troubled borrowers to develop more agreeable payment plans. Some possible options, according to AFSA, are loan refinancing, extending or deferring payments, changing payment due dates and waiving fees. Contact your lender as soon as you know there may be a problem in making a monthly payment to see if an alternative arrangement can be worked out.
Cut costs elsewhere. For many people where public transportation is scarce, a car is a necessity for getting to work, the grocery store or school. Consider expenses you can afford to do without in order to make your car payment instead: cable television, eating out, cigarettes and new clothes are just a few examples.
Sell the car on your own. If you can’t work out a deal with your creditor and can’t afford to continue your payments, consider selling the car. Determine what your payoff amount is and check the vehicle’s resell value with Edmund’s or Kelley Blue Book. If you owe less than what the car is worth, sell the car to pay off the loan. If you owe more than the car’s worth, you may have to come up with some extra cash to pay off the loan or see if the lender will accept a short sale, but that is a better alternative than repossession.
Do your research before enlisting any debt management help. Some businesses advertise that they specialize in assisting with repo prevention. Be extremely wary of sales pitches that require up front fees, and always check out the company with your local Better Business Bureau by visiting www.bbb.org or calling 248-644-9100. Consider enlisting the help of a credit counseling agency as they offer inexpensive, and in some cases free, guidance on how to manage money. You can find a credit counseling agency near you through the National Foundation for Credit Counseling - the nation’s largest and longest-serving nonprofit credit counseling network – at http://www.nfcc.org/ or by calling 1-800-388-2227.
About BBB Serving Eastern Michigan
The Better Business Bureau Serving Eastern Michigan (www.bbb.org) is a non-profit organization with the purpose of preventing fraud and unethical business practices and promoting trust in the marketplace. In addition to its recognized dispute resolution services, the BBB maintains reliability reports on the customer service history of more than 80,000 local businesses and provides consumer education materials on numerous topics. The BBB provides its services free to the public and its service territory stretches across Eastern Michigan from Jackson through Metropolitan Detroit, Lansing, Flint, upward to Alpena, and covers the entire Upper Peninsula of the state.