About Repossession
Repossession is the act by which a lending institution takes ownership of the collateral with which a loan is secured. Lenders take this step when the borrower falls behind in his loan payments and no satisfactory payment arrangements are made. Most commonly seen with vehicles, repossession of real estate is referred to as a foreclosure.
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Significance
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Even as it is said that possession is nine tenths of the law, the fact that a secured loan is directly attached to a tangible asset, gives a number of rights to the lender. In some cases, the borrower is mistaken about the extent of the rights, and in such instances, there is a chance that those repossessing the vehicle and the supposed owner get into conflict and even physical altercations.
Function
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Repossession is a means for a lender to recoup a loss. For example, if you finance a car but fall behind on the payments, the lender may cease the vehicle, sell it at an auction,and apply the proceeds of the sale---minus the cost of gaining physical ownership of the car---to your outstanding loan balance. If enough money is raised to satisfy the debt, you and the lender part ways, although you will have a bad mark on your credit report. If the auction sale did not net enough money to pay off your loan, you are still responsible for the remainder and may be turned over to a collection agency.
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Misconceptions
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It is a common misconception that you have to be seriously behind in your loan payments before the lender may seek to repossess your car. In fact, if you check your loan agreement more closely, you will notice that at the first incident of default, the lender has the right to demand a return of the collateral. In general, lenders do not choose to exercise this right this early on, but reserve this course of action for the more significant defaults of the loan--when it becomes apparent that you cannot keep up with the payments and most likely won't be able to make up any arrears in the near future.
Warning
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Repossessing a car is often portrayed as a cloak and dagger operation, and in many instances this is the truth. Repossession agents---known as repo men in the vernacular---walk a fine line between enforcing your loan contract and breaking the law themselves by trespassing. Law enforcement agencies have decreed that repo agents may not repossess a car from within a closed garage without first getting the owner's permission; on the other hand, a car parked in front of a home or even in a driveway is fair game. Additionally, the agents are not required to have the keys and may force the car open to gain access.
Prevention/Solution
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As a borrower, you have the power to avoid repossession--even if you cannot make the payments as scheduled. Contact your lender as soon as you realize that you are unable to make your payment on time. Some lenders offer a payment forbearance and will agree to tuck on the missed payment at the end of the loan. In other cases, the lender may be willing to renegotiate the loan and extend the length of the repayment terms in return for a lower monthly payment. The sooner you contact your lender to avoid the repossession and work out a deal, the more likely you are to keep your car.
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Resources
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