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Repossessed cars are often cheaper than used vehicles, but buying a repo comes with some risks.
As the economy sputters and the country sees record highs of unemployment, it’s becoming more and more challenging for car owners to pay their loans. This has led to a surge of vehicle repossessions and an expectation that the situation is likely to get worse in the near future.
Despite lenders working with borrowers to help avoid loan defaults and avoid too large a stock of repossessed vehicles, repo companies have begun reopening and operating.
Though the situation is unfortunate, repossessed cars offer an opportunity to those looking to purchase a new vehicle at a hefty discount. However, budget-minded buyers need to be wary of the risks before buying a repossessed car.
Auto loans are a type of secured loan in which the asset — the car — serves as collateral. In the event the borrower defaults, or fails to make car payments as agreed, the lender may exercise its rights to repossess, or seize, the vehicle.
After repossession, the borrower may be allowed to reinstate their loan to get their vehicle back by making the past-due car payments. However, if they’re unable to do so or the finance company otherwise forbids a loan reinstatement, the lender may choose to list the car for sale in an attempt to recoup some of its losses.
Buying a repossessed car is a lot like buying a used car — there are some trade-offs to keep in mind when considering the benefits.
One of the key draws for buying a repossessed car is the potential for its purchase price to be lower than a used trade-in. Financial institutions, such as banks and credit unions, aren’t car dealers. Unless they sell the repo to a car dealer or list it at auction, they likely want to get rid of it as quickly as possible to recoup their losses from the borrower’s initial default.
In turn, those savings are passed on to you. However, don’t expect a bargain-basement deal: Lenders are required to sell repossessed vehicles in a “commercially reasonable manner” that’s not below the fair market value of your area.
Though the repo car may be more affordable than a traditional used car, you’re not going to drive it away in exchange for some pocket change and a stick of gum.
Repo cars often come with a caveat emptor warning — “let the buyer beware.” A repossessed vehicle may not be in the best condition, particularly if the previous owner couldn’t afford to maintain it, and the lender may want to simply get rid of the vehicle rather than allow it to sit there collecting dust (or leaves and bird droppings).
Because so many repo cars are sold in “as-is” condition, what you see is what you get.
Sometimes, you won’t even be able to see the car before you buy it. There may be some dings, scratches, and other cosmetic issues, or the vehicle may need some degree of post-purchase servicing — like oil changes, new tires or brakes, or some buffing out of dings and scratches.
On the flip side, a repossessed car may be in good condition, especially if the previous owner bit off more than they could chew with their original purchase and had it repossessed shortly after buying it. In such a case, their misfortune could be to your benefit.
As with new and used cars, you can take out a loan to buy a repossessed vehicle. If you’re buying directly from a finance company or dealership, you may be able to work with them to structure an auto loan (though don’t rule out a refinance down the line).
To buy a repossessed car at auction, you may be required to get preapproved for a loan unless you plan on buying it in cash.
The process of buying a repossessed car may vary slightly from what you’re used to — shopping around at car lots or browsing sites like Craigslist — depending on the finance company that has taken ownership of it.
Finance companies often retain ownership of a car after it’s been repossessed. From there, they’ll quickly (or as quickly as a bank moves…) turn around to offer it for sale directly to a savvy car buyer like yourself.
Needless to say, there’s a caveat to buying a repossession directly from a lender.
Banks help finance the purchase of vehicles; they’re not usually in the business of selling cars themselves. There’s no ABC Bank Vehicle Service Center or XYZ Credit Union mechanic, which means any repo vehicle sold by such a lender is likely to be sold as-is.
The flip side, of course, is that you could be getting a steal of a deal. Sure, the car may need some TLC, but you’ll, hopefully, save enough on its purchase price to afford to repair any issues.
After a car is repossessed, the lender may decide to sell it at auction to the highest bidder. Many car auctions are only open to registered car dealers, though some may be open to the general public.
If an auction is closed to you, you can do one of two things:
In either case, be wary: not all of the cars sold at auction are in tip-top shape. Some may be lemons — cars that aren’t salvageable and aren’t in working condition. If you’re hoping to buy a repo car at an auction, it’s helpful to have a mechanic friend tag along to make sure you’re not bidding on something you’ll never be able to drive.
Many lenders choose to focus on their primary business and leave the sale of repo vehicles to experts. Enter repo resellers.
Repo resellers serve as middlemen on behalf of finance companies. After repossessing a vehicle, the repo company will put it up for sale. In many cases, they’ll even clean and service the vehicle, similar to the way a dealer would prepare a used car for sale.
As a result, repos sold by resellers are likely to be more expensive than those sold directly from a lender or at auction. Fortunately, the trade-off is a vehicle you can be more confident about buying.
Used car dealers and car lots are often interested in purchasing repossessed cars, particularly those that haven’t been fixed up or reconditioned — like those found at auction. In turn, the dealer will clean and service the car, making it more presentable to buyers — and adding a markup to its price.
Depending on your budget and comfort levels, it might be worth forking over some extra money for the convenience and peace-of-mind in buying from a dealer. Many dealers will work with lenders to help you get a good deal or help finance the sale in-house, in addition to handling the paperwork.
Though some used car dealers sell repossessed cars as-is, others may sweeten the deal with a 30-day warranty or accessories. It’s better than nothing, right?
Purchasing a repossessed vehicle comes with a few possible downsides, but it’s not a wholly unpleasant experience. Before you buy a repossessed car, consider its:
Keep in mind that a car sold as-is is yours. If you drive down the street and the engine lights up like a Fourth of July fireworks show, that’s your problem.
In some cases, you may be able to hire a mobile mechanic prior to purchase.
Cristy S. Lynch, Senior Editor of RateGenius, did just that when she purchased a repossessed hatchback in 2009. Before signing on the dotted line, Cristy enlisted the services of a mobile mechanic specializing in pre-purchase inspections who looked over the car and gave her the thumbs-up on its condition. “I was nervous about buying a repo,” she says, “but the mechanic made me feel confident that I was getting a great deal on this car.”
Not only did Cristy buy a repo in good condition, she saved a heap of money: The car’s market value was $12,000, but it only cost her $9,000 to drive off the lot.
If a third-party inspection isn’t possible, ask if you can at least sit in the car, start it up, take a look at the gauges, and listen for any weird sounds, smells, and other concerns.
So, should you buy a repossessed car or should you steer clear? Ultimately, buying a repossessed car is a lot like buying a used car, though there are some unique risks — and benefits — to doing so.
What matters most is doing your due diligence. No matter how you plan on shopping for a repossessed car, do your research first to avoid a hassle.
Figure out its market value so you know if you’re actually getting a deal. Come prepared with either the skill set to determine the condition of the car, or someone who can inspect it for you. And finally, understand what you’re getting into: In most cases, a done deal is a done deal.
With enough preparation, research, and patience, buying a repo could keep more money in your wallet or purse than taking a more traditional route.
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