You may be wondering, "Can my car be repossessed if I make partial payments?" The answer is yes. Your lender can repossess your car when you make partial payments, regardless of the past payment history.
Generally, it is assumed that partial payments equate to a breach of the contract between the lender and the debtor. Therefore, the lender has the right to repossess your car if you make partial payments.
You can even be sued after the repossession. Since the lender sells the car at an auction to recover the outstanding balance of your loan, the proceeds from the sale may not be enough to pay the loan in full. As a result, the lender may sue you to seek compensation for the remaining amount.
What is car repossession?
The lender has a security interest in cars sold through credit. This means that the car is the collateral that secures the loan. If you fail to repay the loan according to the agreed terms, the lender takes the collateral from you. This is what is called car repossession.
Depending on the state you live in, the lender will wait for a few days before selling the car at an auction. This action is justified by the fact that the lender wants to recover the outstanding loan balance. If the proceeds from the auction settle the loan in full and there is extra money, it will be refunded to you.
What are partial payments?
A partial payment is any payment that is less than the agreed installment amount. A partial payment is not a late payment because it is paid within the agreed time, albeit in less than the agreed amount.
It is possible for someone to make partial payments due to financial distress. For instance, you can lose your job or your regular source of income. As a result, you will be left with insufficient money to pay the car loan installment in full.
When you make partial payments, the lender may interpret it as a missed or late payment. Therefore, you have technically breached the terms of the car loan agreement. This breach gives the lender the right to decide if the car will be repossessed.
Remember that a partial payment can never be considered as a full payment, even if you have a good repayment history. For instance, if you have signed a 60-month loan agreement with your lender and you pay full installments for 59 months and a partial payment for the 60th month, you have breached the loan agreement.
Do all partial payments lead to repossession?
No, not all partial payments result in car repossession. Sometimes, the lender can consider your credit history and decide to give you time to get out of your financial problems. Then, you can make the agreed full payments and avoid car repossession.
When you make a partial payment in a month, you cannot make another partial installment until you clear the balance of the previous month's installment that you paid partially. If you fail to clear the balance and redeem your car loan, the interest rate will skyrocket.
No one wishes to pay high interest rates on car loans. Therefore, you should ensure you redeem your car loan as soon as possible to avoid paying higher interest rates.
Why are cars repossessed?
1. Breach of the loan agreement
Whenever the borrower breaches the loan agreement, the lender has the right to act as it deems fit. The lender can repossess the car and terminate the agreement or give the borrower more time to redeem the loan.
When you sign the loan agreement, you commit to pay the full installments as agreed. Therefore, if you make partial installments even for one month, you have breached the loan agreement you signed with the lender.
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The loan agreement is also breached when the borrower skips payments. When you skip payments, it means you have paid nothing at the end of the agreed time. For instance, if you fail to pay the entire $500 installment at the end of the month, you have skipped the installment payment for that month.
Similarly, if you make payments after the expiry of the agreed time, they are considered to be late payments. While late payments could be forgiven, it is technically a breach of the loan agreement.
2. Insurance issues
Almost all states require that car owners have valid insurance coverage. Therefore, even the car you bought on credit will have an insurance cover.
However, your car might have insurance issues that might lead to repossession. The lenders expect you to procure full insurance coverage on credit-financed cars to protect their interests.
The insurance cover protects the lender from losses in case you do not pay the loan. Therefore, if the lender realizes you do not have enough insurance coverage on the car, your auto loan is canceled, and the car is repossessed.
How to prevent car repossession?
Car repossession is embarrassing and unpleasant. As a result, you should avoid it as much as you can. There are several ways to prevent car repossession.
1. File for bankruptcy
You can approach a bankruptcy attorney to help you in filing for bankruptcy to stop the car repossession. Filing for bankruptcy will give you an automatic stay order that will stop the lender from repossessing the car.
While filing for bankruptcy does not waive the debt you owe to the lender, it will be a temporary fix. You will have time to plan how to pay the car loan before the bankruptcy determination is made.
2. Approach your lender and negotiate new terms
Most lenders do not repossess the car after one partial payment or default. Instead, they wait until you are several payments behind. Therefore, you have a grace period to sort out your finances and make payments in line with the agreement.
You can plead with the lender to allow you to pay lower installments or to give you some time to solve your financial problems. While this may not be the best solution to car repossession, it can work if you have a good credit score and loan repayment history.
3. Pay for the car insurance
To prevent repossession, ensure your car has sufficient insurance coverage. Additionally, avoid defaulting on your insurance premium payments because it will terminate your insurance policy. Therefore, ensure you plan your finances well to avoid car repossession.
The bottom line
Car repossession is a possibility if you make partial payments. These partial payments amount to a breach of the loan agreement because you are expected to pay the full installment without fail. Therefore, your lender has the right to repossess the car when you make partial payments. My Finance Master recommends paying all installments in full and within the agreed time to avoid all these problems.
