How Does the Lender Calculate the Deficiency After Repossessing My Car?

Find out what costs and fees the lender can include in a deficiency balance after a car repossession, and what credits it must give you.

If your car is repossessed, you may later find yourself facing collection of the “deficiency balance.” The deficiency is the amount that you still owe the lender after it sells your car. Typically, the lender calculates the deficiency by deducting the car sale proceeds from your outstanding loan balance. (Learn the basics of how car repo deficiencies work.) But the lender can also charge you for other costs and fees, and may have to credit you for certain payments you made. Below is a general guide to what the lender may include in its deficiency balance calculations.

What Is a Deficiency Balance?

When you stop making payments on a car loan, the lender may arrange to have your car repossessed. Following a repossession, the lender sells the car. If the lender does not receive enough proceeds from the sale of the car to cover your outstanding loan balance, plus any additional fees that may be applicable, you may be on the hook for the remaining balance – called the deficiency balance.

Some states limit the lender’s right to collect a deficiency in certain circumstances. To find the law in your state, see State Limits on the Collection of Deficiency Balances.

Example. You purchase a car for $10,000. At the time of default, you still owe the lender $5,000. The lender repossesses your car and sells the car for $1,000 at an auto auction. This leaves a remaining loan balance of $4,000. The lender also incurs expenses of $200 in the process of repossession and sale of your car. So the total deficiency balance is $4,200.

$5,000 – $1,000 = $4,000 (loan balance) + $200 (expenses) = $4,200.

Calculating the Deficiency Balance

The lender calculates the deficiency balance by starting with the outstanding loan balance, and then subtracting certain amounts (these are essentially credits to you) and adding other amounts (such as fees, costs, and other things listed below).

This is a general guide. Your loan contract and the law in your state will set forth the types of fees, costs, interest, penalties, and the like that the lender can subtract.

Start with the outstanding loan balance. This is the amount you owe to the lender when you default.

Subtract the amount of sale proceeds. This is the amount the lender gets when selling the car. In the above example, the amount is $1,000.

Subtract unearned interest. The lender must credit you for unearned interest you paid prior to the default.

Add expenses related to repossessing and selling the car. The lender can add reasonable expenses it incurred to repossess or sell your car. These might include costs for towing, storing, and repairing your car, and auction costs.

Add interest and penalties incurred after default. Whether or not a lender may charge you for these types of fees will depend upon the terms of your agreement with the lender. Limitations and prohibitions on the collection of interest, penalties and legal fees also vary by state law. Under some state laws, such fees are impermissible even when provided for under an agreement with the lender.

Add the lender’s legal fees. Again, whether the lender can add these to the deficiency depend on your contract and state law.

Your Right to an Accounting of the Deficiency Balance

Prior to the repossession sale, the lender must provide you with a written notice that informs you of your right to an accounting of the balance owed at that time. Also, following the repossession sale, if you request it, the lender must send you an explanation of how it calculated any deficiency (or surplus, if applicable) balance.

Following the repossession sale, the lender may send you a letter demanding payment of any deficiency balance owed. Within 14 days of the lender’s demand for payment of a deficiency balance, the lender must send you a written explanation of how it calculated the deficiency balance. The deficiency balance calculation should account for each aspect of the deficiency balance that the lender claims you owe.

Checking the Lender’s Calculations

It’s always a good idea to review the lender’s accounting for errors.

Compare it to your own records to ensure all payments that you made were properly applied to the loan.

Check to see if the lender charged you for fees that were not provided for under the terms of your agreement with the lender, or permissible under your state’s law. If you are unsure, talk to a local attorney.

You may have other defenses to the collection of a deficiency balance. To learn more, see Defenses to Car Repo Deficiency Lawsuits.

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