If you have failed to make your car loan payments as agreed, or, in some states, if you have failed to maintain car insurance, the bank or lender can repossess your car. Repossession means that the bank can take your car back without going to court, filing a lawsuit, or even giving you any advance warning. However, banks and other lenders do have to follow some important rules in repossessing your car, or they may have to pay certain penalties and/or damages to you.
Typically, the contract that you signed for your car loan will define what has to happen for you to “default”, or not keep up your end of the loan agreement. Most commonly, default happens when you don’t make your loan payment as you agreed. If you default, then the bank can repossess your car. Although the bank can send someone to come onto your property to repossess the car, he or she cannot “breach the peace”, the meaning of which varies from state to state. For instance, the person attempting to repossess your car cannot threaten you or physically assault you during the repossession. If he or she does “breach the peace”, then the bank might have to pay a fine or compensate you for any damages that were caused by the repossession. Likewise, you are entitled to get back any personal property that was in the car at the time it was repossessed.
Once your bank has repossessed your car, the bank can either keep the car or resell it publicly or privately. In some states, the bank may have to notify you about how the car is going to be sold; this information gives you the ability to “redeem”, or buy back your car at the sale or auction. If you cannot redeem your car, however, the bank has to sell your car in a “commercially reasonable” manner. This doesn’t necessarily mean that the bank has to sell it for the amount of your loan, or even the amount that the car is worth, but it has to be a reasonable sale.
Plus, if the bank can’t sell your car for the amount that you still owe on your car loan, then you may owe the bank the “deficiency”, or the difference between the amount that the car sold for and the amount that you owe on the car loan, plus interest and fees. If there is a deficiency, then the bank can sue you to collect that money from you. On the other hand, if the bank sells the car for an amount that is greater than what you owe on the car loan, then the bank has to give you the surplus amount.
The bottom line is that if you want to avoid having your car repossessed, you should make every effort to communicate with your bank or lender if you are having difficulty making your payments. In some situations, you may be able to work out a different payment plan or loan with the bank, which will avoid repossession. Furthermore, if you simply cannot afford the car loan payments at all, then you might be able to work out a voluntary repossession of the car, which can reduce costs for both you and the bank.