Repossession

Repossession occurs when the lender of a secured loan takes possession of the property used as collateral or security because of default or nonpayment. In most secured loans, the lender has the right to take possession of the collateral if the borrower does not follow the terms of the loan agreement, or if the loan is not paid.

The lender is able to take possession of the property because in most cases, he retains ownership of the property. The usual arrangement for secured loans is for the lender to keep legal ownership or title to the property until the loan is paid.

The lender will have to present evidence that the borrower has not followed the terms of the loan in order to repossess collateral. Since repossession is usually quite expensive, it is usually only practiced for big-ticket items like automobiles.

Repossession & Foreclosure

In the United States, the term repossession applies when seizing collateral other than real estate. However, when seizing real estate, the term for this category of legal procedure is foreclosure.

Foreclosure usually requires some sort of court action. Repossession normally does not require any sort of court action.

Lenders only resort to repossession in cases where the collateral is easy to move. For example, many car dealers will make auto loans without running a credit check because they can repossess the vehicle involved simply by moving it.

Historically, some retailers did make secured loans for the purchase of items like appliances and electronics. This gave those retailers the right to repossess such items. Today, most retailers do not make such loans because the cost of repossession exceeds the cost of the items. Instead, they rely on credit arrangements and the threat of credit reporting to ensure repayment.

Repossession & Non-Recourse Loans

Persons who take out secured loans should be aware that repossession might not automatically end a person's obligation to repay a loan. In the case of most auto loans, the borrower is obligated to repay the still-outstanding amount of the loan after repossession.

There is a class of secured loans called non-recourse loans, in which the borrower's obligation to pay ends with repossession. In some states, all mortgages are non-recourse loans. Non-recourse loans that are not mortgages are very rare in the United States.

Repossession & Surrender

A related concept to repossession is surrender, which is available to those who have secured loans. In surrender or voluntary surrender, the borrower simply returns the collateral to the lender. Most lenders give borrowers the option of surrender because it is cheaper and easier for them.

A typical example of surrender would be the case of a person who takes a car back to the dealership, because he cannot make the payments. Many secured loan agreements do provide for voluntary surrender.

As with repossession, voluntary surrender does not necessarily end a person's obligation to pay a loan. Usually, a person who surrenders collateral will have to pay the portion of the loan remaining unpaid after disposition of the collateral by the lender. The lender does have the right to forgo this payment in the case of surrender.

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