How Does a Repo Work?

Background

The word repo is short for repossession. It occurs when a lender from whom you took a secured loan gets possession of the asset with which you secured the loan.

Process

The logic behind securing a debt with some asset (known as collateral in financial and legal circles) is so that the lender can sell off or keep the property in the event of your being unable to repay what you borrowed. In most jurisdictions, you deposit the document that constitutes ownership of the property---the title if the asset is a piece of real estate or a logbook if the property is a vehicle---with the lender when you borrow. This effectively places a lien on the asset, so you cannot sell it to someone else while you are still servicing the debt.

You remain the legal owner of the asset unless you prove unable to honor your obligation to the lender, at which point the lender might be forced to start the repo process. At the end of the repo process, the lender takes possession of the asset and will sell it or keep it to recover the outstanding loan amount.

Just being unable to honor the debt does not automatically lead to a repo in most cases. A repo is usually undertaken only as a last resort when it has become completely clear that you will be unable to honor your obligation, and even then, the repo is preceded by reasonable warning, which is specified in law.

Considerations

During the warning period before the repo process is initiated, you have the option of talking to the lender to try to renegotiate the terms of the debt. You might even consider taking another debt to pay off your current debt to avoid the repo process, which is likely to have a negative effect on your credit rating and is therefore something you should do everything possible to avoid.