Car repossessed? Here’s how you can finance your next purchase

Car repossession is quite a painful experience. Imagine purchasing your dream car after all that planning & hard work, and then one fine day it is taken from you (forever). Why? Because you failed to make timely repayments to the car financing company or bank.

Logically, it seems right on the part of the lender, who trusted you with money and you failed your commitment. But humans are emotional beings and when forced to part ways with something you loved and purchased with your heart, it is very difficult and tragic.

But does that mean - it is the end of your car ownership journey and you’ll never be able to purchase a new car under your name? No lender will ever trust you and you can only purchase a car in cash, no credit?

In this article, we’ll be discussing car repossession and the defaulter's future as a car owner.`

Understanding car repossession

What is car repossession? Car repossession is the process whereby the bank or financial institution takes away the vehicle from the owner, due to failure of car loan payment. Further, the term ‘repossession’ in the Philippines is regulated both by the law and the loan agreement. However, the timing of when the car will be pulled out after non-payment depends on several factors.

 

Factors influencing car repossession timeline

The big question is ‘When can a car be repossessed after non-payment?’.
Answer - The timing of when a car will be pulled out by a bank or a financial company depends on several factors. Below we have discussed each in detail -

Loan agreement & default	The loan agreement specifies the terms set for repossession. Mostly, a borrower is considered a defaulter after missing a certain number of consecutive payments. However, before initiating the repossession process banks often send reminders and offer a grace period.
Notice of default & demand to pay	Before repossessing a car, banks are required to issue a formal notice of default to the borrower. It typically is a demand to pay an overdue amount within a given time frame.
Right to cure	It is an opportunity provided by the bank to the borrower, to avoid repossession. The length of the ‘right to cure’ is specified in the loan agreement, during which the borrower can cure the default by paying the overdue along with any fee or penalty.

 

Car Repossession Process & redemption

After defaulting on the loan repayment for some time and non-adherence to bank notices, the lender can proceed with repossession. In the Philippines, car repossession can be done either judicially or extrajudicially, both are explained below -

Judicial Repossession	Extrajudicial Repossession
The lender files a case in the court to recover the vehicle. Writ to replevin is insured by the court which allows for immediate possession of the vehicle. It is preferred either when the borrower challenges the default or when there is a dispute regarding the terms of the contract.	More common repossession practice among the two; it doesn’t require a court order, provided certain conditions are fulfilled. Common in chattel mortgage contracts which contain the power of attorney clause, allowing the lender to possess the vehicle extrajudicially. It is faster, and cheaper, but requires adherence to legal standards.

Note, in both cases the lender is not allowed to unlawfully repossess the vehicle, i.e., without proper notice or via force. The vehicle repossession must occur peacefully while complying with the law and contract.

What happens after repossession? In some cases, after the car has been possessed by the bank, the owner has a chance to reclaim it by paying the outstanding balance along with the repossession cost incurred by the authorities. Tagged as the redemption period, it differs in terms of duration and terms depending on the bank’s policies.

In case, the borrower fails to redeem the car during the redemption period, the bank can resell it and recover the unpaid debt amount. What’s next? Will you be able to buy a car again? If yes, will you be able to finance it? Let’s find out.

Also Read: Understanding Balloon Payment: A flexible financing option for Filipino buyers

Car financing after repossession

Everything is possible and so is financing a car with a repossession history. The thing is car repossession poorly reflects on your financial health and creditworthiness. So, to be able to finance a car again, you would need to work on improving your financial front and build confidence in the lender’s mind about you being a trustworthy candidate.

Here are a few tips to improve your financial health (credit score) which in turn help you finance your next big purchase.

Tip 1. Pay your debt

Go to the lender and inquire about any uncleared debt; remember it is a crucial part of your new financial journey. Try and repay the remaining balance on the repossessed car, because by doing so, you are building trust and reassurance in the lender’s mind. Thus making it easy to get approval for a new car loan. On the other hand, if you make no such efforts, your loan application will surely be a part of the rejected pile.

Tip 2. Wait before buying

The impact of car repossession on one’s credit score card can be seen for a long time, however the impact diminishes with every passing year. So, if your car has been repossessed recently, we’d suggest waiting for some time before applying for a new car loan. Give yourself and your financial health some time to improve and emerge stronger than ever. As time passes and you make regular repayments, your credit score will improve and it will be easy to secure a loan.

Tip 3. Make a sizable down payment

Whenever you plan to buy a car (certainly after your financial health improves) make sure to make a big down payment. Surely, doing so will require some extra effort on your part, but it has its perks. Firstly, applicants making a hefty down payment are preferred by the lenders, secondly, it will result in a reduced loan amount, meaning less burden on you in the future.

Tip 4. Get a credit card with a low limit

A smart and easy way to improve your dented credit score (due to car repossession) is getting a credit card but with a low limit. Make sure to use it responsibly and make timely payments. This will have a positive impact on your credit score.

A secure credit card is also a good option, here a security deposit equivalent to the card limit is required to be deposited. It is a win-win situation, as it protects the creditor from risk and when used for sending it improves your credit score.

Tip 5. Make sure the documentation is on point

When applying for a loan, a borrower is required to submit a few necessary documents. The list includes -

• Valid government-issued IDs like driver’s license, passport, SSS ID, etc
• Proof of income like the certificate of employment (COE), payslips, or Income
• Tax Return (ITR) for employed applicants
• Proof of residency like utility bills
• Bank statements, financial statements, business registration, permits for self-employed applicants
• Proof of remittance, COE, or payslips for Overseas Filipino Workers (OFWs)

However, the documentation requirements may vary with lenders, so make it a point to inquire about the requirements at an early stage. Remember applicants with complete documentation in order are favored.

Tip 6. Be true about your credit history

When in a meeting with the lender, make sure your every statement is fact-checked, in simple words be honest, don’t try to hide stuff. With all those records and documents, a lender will easily figure out all your wrongdoings with much effort. So, never tell a lender something that isn’t true, it will only complicate the matter and make approval challenging.

For authenticity purposes, lenders might demand a written explanation from your previous lender on why the car was repossessed. It will act as a confirmation of the life-altering event that leads to your car’s repossession.

Tip 7. Be smart; finance what you can afford

Be realistic when making your next big financial move after repossession. Do not indulge in luxury purchases unless you are very well secured financially. Until then look out for cars that fit your budget comfortably and won’t disturb your financial health in the long term.

How to avoid car repossession

Here are a few tips that help save yourself from the pain of parting ways from your beloved car.

• Repay your car loan without any delay. For this to happen, do proper financial planning, create a budget, and allocate resources to the expenses wisely.
• If under financial strain, have a word with the bank or lender. Lenders offer hear plight and more repayment time to the borrowers.
• Re-financing is a great option to consider if you can’t afford to pay your mortgage anymore. The bank will either extend the loan term or reduce the monthly payment.
• The last option to skip car repossession is selling. Yes, you can sell the car and use the amount to repay the debt.

Bottom line

Remember, car repossession is not the END of your car ownership journey, times change and so do the circumstances. Plus banks and other financial institutions consider your current loan repayment capability and not past or future defaults. So, make a fresh start, work on improving your credit score, improve financial planning, and in no time you’ll be able to purchase a new car.

Also Read: Exploring Car Loan Programs in the Philippines