Delaying payments, incurring debts, or defaulting on a loan can result in a withdrawal. But how does the withdrawal work? It can be a complicated process and there are several types of withdrawals to consider.
Repossession often means that an agency – like a bank or a debt collection agency – is given the right to confiscate your property in order to pay a debt. It also has the potential to negatively affect your credit score, making it harder to borrow again in the future.
If you’re worried about the withdrawal or just curious about what it is and how it works, read through for a full explanation.
We begin by explaining the meaning of withdrawal.
What is redemption?
Redemption occurs when a bank or other government agency takes ownership of an asset, usually to repay an outstanding debt. Assets that can be redeemed include cars, real estate, jewelry, or any other tangible item that can be used to reduce the amount owed.
How redemption works
Withdrawal is used to help lenders ensure their debts are paid off – or as close to paying as possible. The exact guidelines that will determine when a lender can take back your property may depend on the company you have worked with, the local laws of your state, and the specific contracts you signed when you took out the loan or funded the asset to have.
In a typical case, repossession is used when it becomes clear that the borrower is no longer able to make payments on their loan. In many states, just missing a single payment is enough to give lenders the right to reclaim your assets, although some lenders may be more lenient.
For example, suppose you financed the purchase of a car but stopped making payments. At this point you are in defaultThis means that you have failed to meet your financial responsibility to repay the loan at the interest rate and amount that you specified when you signed the contract. At this point, your lender (if more lenient) can hit you with a fee and ask you to make up for missed payments.
If you still can’t complete your payments (or your lender is Not lenient), you can exercise your right to have your vehicle taken back. At this point, they can dispatch collection agents to collect the vehicle or other assets to settle your debts.
Not only does redemption mean that you will no longer be entitled to have the asset redeemed, but it can also have a detrimental effect on your ability to borrow money in the future – more on that in a later section. But first, let’s review the different take-back types.
Types of withdrawal
There are two major types of repossession that happen to consumers who have defaulted on debt repayment.
Voluntary redemption occurs when a borrower willingly turns over their assets to the lender in order to lower or settle their debts.
Involuntary withdrawal is much more difficult. This occurs when a borrower is unwilling to surrender their property or assets and the lender therefore dispatches redemption agents to forcibly take over the property to which they are entitled.
Note that many states have laws preventing lenders from forcibly taking back your assets. They also typically cannot get into your home to retrieve the asset or otherwise disturb the peace. However, you are allowed to reclaim the asset without express permission – hence involuntarily Withdrawal.
- Note: If repatriation agents attempt to use threats, violence, or damage to your property as a means of confiscating your property, you should call the police. It is illegal to break the peace while assets are being repossessed, and state law protects borrowers from forcible repossession (although the exact laws vary from state to state). If so, you may be able to sue.
Both voluntary and involuntary withdrawals can have a negative impact on your personal finances. Just because your property has been repossessed does not mean that your debts have been paid (unless otherwise stated by the lender). You may still owe the balance that remains after the return of your property has been deducted.
In addition to being robbed of your wealth (it’s usually something big and important – like your car), the repossession also hurts your creditworthiness.
How does the redemption affect your credit?
As soon as the redemption has taken place and you have lost your assets, the trouble is unfortunately far from over. Lenders can report the fact that you have got an asset back to the credit bureaus responsible for establishing your creditworthiness.
Why is that important? Your credit score is essentially a measure of how trustworthy lenders consider you. The higher the score, the more trustworthy – and the easier it is to get a loan with a low interest rate. If you have low credit scores it can be difficult to secure funding in the future, and if you do, interest rates are likely high.
According to Debt.orgThe withdrawal remains on your credit score for approximately 7 years. While the damage it does to your score diminishes over time – especially if you practice healthy credit habits after withdrawing it – the burden on your credit will increase for 7 years from the date you first defaulted on your credit were not completely eliminated payments.
The good news is that bad credit is not permanent. There are steps you can take to improve your credit score. However, this can take some time, which is why it is important to avoid withdrawals if possible.
This is how you avoid taking back
Once you’ve already defaulted or stopped receiving a loan, avoiding a withdrawal can be difficult. Depending on the terms of the contract that you signed, your lender may have the right to reclaim your assets once you have been in default for a period of time.
That’s why the best way to avoid withdrawal is to practice healthy financial habits before it becomes a problem. Here’s what to focus on:
- Budget for your loan payments
Budgeting can be a challenge if you’ve never done it before. Mint makes it easier. Instead of wondering where all your money is going at the end of each month, you can use it to smartly plan your expenses, track purchases, and make sure you are on the right track.
This can help you to pay off a debtSo you don’t run the risk of defaulting on a loan, defaulting on payments, or risking repossession. Sometimes careful financial planning is enough to keep your various tasks under control.
- Plan ahead before purchasing
Of course, all of the planning in the world won’t help if you don’t have the money to make your payments. Before deciding to finance a large purchase – like a car or a home – it is important to plan carefully in advance.
When talking to potential lenders about financing, make sure you get an estimate of what your monthly payment will be and whether that payment is fixed or floating. Then, when you get a feel for what you are responsible for, factor it into your monthly budget to see if making payments is putting a strain on your finances.
If you lose your job or suddenly there are other unavoidable costs, a backup plan is essential. Most experts recommend saving your income in an emergency savings account worth 3 to 6 months just in case something goes wrong. That way, even if you lose your job, you’ll have cash on hand to prevent redemption and other financial disasters.
- Work with trusted lenders
After all, not all lenders are created equal. Some can jump to regaining your fortune once you miss a payment. Others are more lenient and may give you grace before going into more serious and aggressive ways to collect your debt. If you have a problem and miss a payment, know you don’t need to panic right away.
Note: For sure Military service members are also protected from the withdrawal by applicable laws. If you’re in the military, you may have other options to avoid a withdrawal.
The central theses
Be sure to remember this information before you get started:
- Redemption occurs when a credit agency or bank confiscates assets in order to settle (or partially settle) an outstanding unpaid debt.
- The withdrawal can be voluntary or involuntary. If it’s involuntary, it’s good to know your rights. For example, take-back agents cannot use force or threats to get your belongings back.
- The withdrawal can also damage your credit and it can take up to 7 years to be completely removed from your credit history. In the meantime, by practicing careful finances, you can improve your credit score.
- The best way to avoid a withdrawal is to Budget carefully, plan your big spending, build emergency savings, and partner with trusted lenders.
Withdrawal may seem like a nightmare, but it can be avoided with the right steps. Make sure you know your rights, work on your financial wellbeing, and plan ahead to avoid the worst of the withdrawal.
FTC | Car and driver | ConsumerFinance.gov | Debt.org