What Is Repossession?
Repossession is a term used to describe the seizure of a borrower’s property when they default on a loan. Usually, it happens when a borrower at the point of obtaining a loan enters an agreement to pay the lender back at a specific time. If this does not happen the borrower must forfeit something valuable.
A loan is a sum of money borrowed from a financial institution or other means. It is to cater for planned or unplanned events. By obtaining a loan, an individual or company incurs a debt they have to pay, often with interest, and within a given period.
Loans can be classified into two – secured and unsecured. A secured loan is a loan in which the borrower presents an asset as collateral. This can be items such as title deeds, bonds, or personal property. The owner agrees to forfeit it if they default on paying back the loan. On the other hand, an unsecured loan is one that a borrower does not present any asset as collateral.
Repossession deals with a secured loan. If the contract signed before obtaining the loan gives the lender the power to take possession of the presented asset if the borrower fails to pay back, the lender can engage that clause to recover their money. A lender can repossess the asset and sell it to mitigate the loss.
If you take an auto loan, you likely made these promises before you got the loan:
- You will pay the loan back within a period
- If you fail to pay the lender back after the period elapses, they can sell your vehicle to cover the loan you took
- If the amount realized after the sale of your vehicle is not sufficient to cover the loan, you still owe what is left
When the time elapses and you cannot pay, the lender will take your car. They may then sell it at an automobile auction. This is regardless of your reason for default. If the price the car sold for at the auction cannot cover the loan, the lender can still try to make you pay for the balance. Alternatively, they can “write off” the amount you owe.
If you take a loan with such an agreement and realize you wouldn’t be able to pay off the loan, check with your lender and plead that they alter your original deal or extend your loan.« Back to Glossary Index