QandAs: Loans

What is Repossession?

Answer:
Since the majority of consumers do not have enough

cash to purchase an expensive item outright, many choose to finance their purchase with credit cards or private financing. If you’re buying a home or an automobile, credit approval is an important process. Prior to approving a loan request, the lender reviews a borrower’s credit report and determines a fair interest rate based on credit history.

Borrowers agree to the loan terms and finalize the paperwork. Finally, the borrower takes possession of the item. Although the borrower owns the property, the lender can justifiably reclaim the asset. Repossession occurs when a borrower defaults on their loan payments.

Repossessions are common with automobile loans. However, lenders can reclaim any piece of property used as collateral for a loan. Repossession laws vary from state-to-state. In most cases, lenders provide a grace period, wherein a late payment doesn’t put the borrower at risk of repossession. During times of financial hardship, some lenders are flexible and allow borrowers extra time to catch up payments.

Once lenders repossess a piece of property, the item is typically sold at auction. Unfortunately, lenders are rarely able to recoup their entire investment. After the property sells at auction, the original borrower becomes responsible for the outstanding balance.