How to Get a Loan with Bad Credit After Vehicle Repossession

The penalties for not being able to make payments on your debt can span from high-interest charges to collections, and at worst, bankruptcy. Unfortunately for some Canadians, unforeseen events can make it difficult to honour debt obligations. And when it comes to your car, if you can’t afford to pay for it, you’re not allowed to keep it. 

In this article, you'll learn:

1. What is repossession?
2. What happens after your car is repossessed?
3. How to repair your credit after repossession
4. How to get a car loan after repossession

What is repossession?

Repossession is when your vehicle is taken away due to defaulted payments. Repossession is a non-negotiable act that entails your car being towed by a “repo man” and taken back to the lender. The lender will usually auction the vehicle off and apply the money to the debtor’s loan.

Typically, it only takes one default payment for a person to be at risk of repossession. Although, a person who has a history of making regular payments on their auto loan is at less of a risk of having their car repossessed compared to someone who has defaulted more than once.

In Canada, there are two types of repossession:

1. Voluntary repossession: When a person can’t make consistent car payments and willingly brings their vehicle back to the lender/dealer because they recognize that they can’t afford the auto loan.
2. Involuntary repossession: When a person has defaulted on multiple loan payments and refuses to bring the vehicle back, the lender can legally reclaim the vehicle without the debtor’s consent.

The speed in which involuntary repossession occurs in Canada can sometimes depend on where the debtor lives – a person who lives up North or on an island, for example, might not have their car repossessed as quickly in comparison to someone who lives in a city. Although lenders are strict and take the act of repossession seriously, it is advised that a person speak with the lender if they can’t make a payment to see if a financial agreement can be settled. The lender might give someone who is honest about their debt situation an extra 30 days to pay back the amount owed.

If a lender grants a debtor more time to pay back a loan, it’s the consumer's obligation to do everything in their power to make the agreed payment. This could mean cutting back on weekly budgets, picking up extra weekend jobs, or putting any savings towards the owed payment. Any payment, even if it’s small, is better than nothing at all.

 My car was repossessed, now what?

Unfortunately, car repossession occurs more frequently than we might think. Fortunately, if you’ve experienced car repossession, you’re not doomed for financial failure, and you’re not alone.

A person who has experienced repossession needs to first see how their credit was impacted. Repossession marks on a credit report could drop a score 60 to 240 points. A larger drop will happen to Canadians with good credit scores because it reflects a new risk level to creditors.

How long does a repossession stay on your credit report?

Repossession could stay on a person’s credit report for up to seven years. However, this doesn’t mean that the actual score will remain low the whole time. Based off credit history, lenders will consider the risk factors of an applicant, and through the process of a credit review, they’ll determine if you can qualify for a loan or not.

How to repair credit after repossession

Should you ever experience having a vehicle repossessed, follow these five steps to ensure that your credit doesn’t get further damaged and to increase your chances of getting a low interest auto loan in the future.

1. Avoid closing lines of credit (and avoid opening new ones): Instead of closing credit cards or other lines of credit, try your best to reduce the debt owed by making regular payments on time. Closing a line of credit could reduce your available credit, which in turn can damage your score, which is the last thing you want on your credit report after dealing with repossession. Additionally, avoid opening new lines of credit. Instead, focus on paying down the debt that you owe. Demonstrating exceptional repayment habits will increase your chances of getting an auto loan with fair interest rates.
2. Repay outstanding debt on your car loan: If the sale value of your repossessed car is less than what you owe, lenders expect you to pay the difference, even if your car was taken away. Prioritize this debt to protect your credit from getting damaged even more.
3. Start saving for a down payment: Getting approved for an auto loan after having a vehicle repossessed isn’t easy because lenders see a person with repossession as a risk. However, having a history of repossession on your credit report doesn’t mean that you can never own a car again. Putting a down payment on your next car loan is a great way to increase your odds of getting approved by lenders as a down payment demonstrates that you’re capable of saving money, which reduces the risk for a lender.
4. Think affordable: When you’re ready to apply for a new auto loan after repossession, think affordability. The more affordable the vehicle is, the easier it will be to pay off. An affordable vehicle means less money borrowed, which means better chances of getting approved by lenders.
5. Be prepared: Coming out of a repossession situation is difficult for a lot of reasons. Lenders view you as a risk and your debt could feel heavier than ever. But focusing on developing a responsible payment history is what will get you to where you need to be credit-wise, thus proving to lenders that you’re capable and responsible enough to borrow money.

Can you get a car loan after a repossession?

Often, a person with repossession on their credit report will have a more difficult time obtaining a car loan because they are considered a high-risk to lenders. In the lender’s view, if you’ve defaulted on one car loan, what’s to prevent it from happening again? Luckily, more lenders today are willing to take chances on borrowers with less-than-perfect credit through subprime financing.

How to buy a car after repossession

Wondering how you’ll get back in the driver’s seat? We have good news... your credit score may have taken a hit, but that doesn't mean it's impossible to get approved. These tips will help you get approved again after a repossession.

1. Prepare your down payment. If you’ve been saving up a down payment to buy a car, make it readily accessible in a chequing account or in cash. While zero down options do exist, a down payment will boost your chances of loan approval.
2. Get pre-approved. Getting pre-approved is a good way to understand how much you can afford before you start looking. It can also help you get connected with lenders and dealerships that know how to help. Get pre-approved today, it only takes 2 minutes!
3. Acknowledge your history with the lender. There’s no need to hide your previous credit history from the lender – they’ll see it on your credit report. Instead, openly discuss the repo so that the lender can more accurately advise you on getting your application approved. 
4. Line up a co-signer. Sometimes, you need help getting back on your feet financially. If you have a parent, friend, or family member who is willing to co-sign for your loan, you will have a greater chance of success getting approved. 
5. Choose an affordable car. Select a vehicle that’s easily within your means to make payments consistently. Again, this is why a car loan pre-approval is a good idea as it will help you understand exactly how much of a car loan you will get approved for.  

Pro tip: Protect your investment. Often, unexpected car repair expenses force car owners to choose between making payments and fixing their cars. Buy a car with a warranty or add an extended warranty to help eliminate the potential for surprise bills.