Certain loans are secured by collateral. Collateral is something of a value that creditor can take if you default on a loan. The most common loans like these are mortgages and car loans. In these cases, houses and cars are served as collaterals.
When you finance a car purchase, creditor places a lien on the car, and becomes the lien-holder on the title and registration. That is why you only get your title after loan is paid in full. So the car is the collateral now and can be seized without a lawsuit.
If you become delinquent on car loan, the creditor can repossess the car. Repossessor can pretty much come any time and take your car using proper keys or simply breaking into. You don't own your car, bank does. Repossessor have no right to break into locked garage though. And also, he or she may not "breach the peace", whatever it means.
Even if you can't make payments and return car voluntarily, it is still a repossession.
Cars loose their value rather quickly. The minute you drive off the dealer parking lot, it loses around $1,500. Also, as with any loan, you are paying lots off interest. So the car can depreciate or loose value faster than you build any equity in it. The loan often becomes greater than the resale value of the car.
If the sale price of repossessed car is less than the remaining loan balance, there is a shortage called deficiency, and you are liable for this shortage. The creditor may then file a lawsuit and obtain what is called a "deficiency judgment" and go after your bank accounts and wages.
Repossession will ruin your FICO credit score. Your FICO will drop many points, stay that way for quite a bit, and the very negative credit indicator I8 or L8 will appear on your credit report.
So you have to be careful. If you are about to become delinquent and facing certain repossession, try to find someone to take over the payments and your car, of course. You need permission from the creditor, and it should be easy to get one since it would save creditor's time and money for going after you. You can save your credit rating somewhat by doing this. However you need to negotiate with creditor so they would report your loan "PAID AS AGREED.
See also foreclosure.
