A sound outside awakens a man in the middle of the night. He looks out in time to see his car being towed away.

At first he thinks it’s an auto theft in progress. Then, half awake, he recalls how far behind he is on his car payments. Could it be…?

It could. About 1.5 million cars a year in the U.S. are repossessed from owners seriously in arrears.

That’s expected to increase, as the auto-financing industry anticipates more loan delinquencies in 2008, according to a survey of lenders.

“Better than 50% of respondents project that,” says JJ Hornblass, chairman of the Auto Finance Summit, an annual industry conference. “It is consistent with a poor credit-performance environment. More lease delinquencies also are expected.”

It will be “a tricky environment,” he says.

The forecasted rise in repos would continue an upward trend that started in 2006 when 1.4 million vehicles were confiscated, a 5% increase, according to Manheim Consulting.

Tom Webb, chief economist for Manheim, estimates delinquency rates increased repossessions by 10% in 2007.

There are assorted reasons car owners default on their loans to the point that a lender sends out agents to get the vehicle back. Reasons range from falling on hard times to irresponsible behavior with finances.

Another cause is that some dealership customers pay less attention to the price of a costly car and more attention to the monthly payments, without grasping how long those financial obligations can last.

“It’s sad,” says Mark King, general manager of Roy Robinson Chevrolet Subaru in Marysville, WA. “They lose sight of the effect of 6- to 7-year payments. All they’re looking at is the monthly payment.”

Protracted payments can lead to loan defaults, especially as vehicles age and depreciate, and owners risk becoming “upside down,” or owing more on a car than it is worth.

“Dealers don’t advocate 84-month loan payments,” King says. “It’s really a last resort. The problem is that a new SUV on the high-end side is $40,000 to $50,000.”

Some financially unsavvy customers need to be educated on the downsides of long-term loans and of buying a vehicle beyond their means, say experts.

“We need to make sure that the loan you are buying is the loan you think you are buying,” says Alexander J. Keechle, senior vice president of Drive Financial Services in Dallas.

“Also, get more money down,” he advises dealers. “That’s not an industry secret, but yesterday’s exception is today’s expectation.”

Lenders differ on when to pull the trigger on someone who is delinquent on a car loan. Some lenders are more patient, trying to right-size the situation in hopes of getting the money due. Others are quicker to repossess the car.

“I’d rather take the money than the car, even at the risk of the delinquency going up,” says Joseph Pendergast, group vice president-operations manager for Chevy Chase Bank.

Keechle disagrees.

“We wouldn’t adapt that policy,” he says. “If the customer can bring the payment up to date, and if there are indications of that, it is best for everyone. If not, it is best to collect the car ASAP. Waiting means the car is that much more devalued.”

People depending on a car to get to work “will do everything they can to pay their car loans,” Keechle says. “But when they can’t pay, they won’t. When they make that decision, it’s best to get the car without delay.”

It’s not that clear cut, says Jonathon Levin, president and CEO of auto-lender Turner Acceptance Corp.

“There always will be some customers who will stop paying on their loans,” he says. “But if you give the tools to others to pay, they will – or will try to. It is not wise to just yank the car from them.”

Levin says his firm is “reaching out to borrowers more than ever” in efforts to make sure customers don’t default and risk vehicle repossession.

There’s a chance for success “as long as there’s a voice on the other end of the line,” he says. “We make it clear that we want them to succeed. And they want to, as well.”

Contributing to the expected rise in car-loan defaults is the ripple effect of the subprime mortgage crisis, some lenders say.

“There was a shock in the mortgage market, and liquidity dried up,” says. Keechle. “Clearly there were some missteps in doing loans without proven income.”

But the shock to the system “allows a return to a more rational way to underwrite,” he says. “It’s good for all of us.”

Some financially strapped consumers, facing a choice of defaulting on their car loan or home mortgage, will choose the latter.

“You can always sleep in your car, but you can’t drive your house to work,” Pendergast says.

Adds Keechle: “If you default on your car, the options are much fewer. In the U.S., people need cars to get around. If you default on your home, you have the option of renting an apartment.”

The No.1 reason for auto loan defaults is the vehicle owner can’t afford it, and No.2 is the car breaks down, he says.

Avoiding loan defaults includes making sure dealers are acting properly, Levin says. “It’s a matter of putting customers in the right car with the right payment plan.”

Lenders that proceed with vehicle repossessions should make sure they are following the letter of the law lest, they be sued by an irked consumer, says lawyer Mark Edelman, who represents financial institutions.

“We’re seeing litigation involving repo notices,” he says. “You can’t use the same form in all 50 states. Eighteen states require a notice before repossession. Eight more states have a requirement that you must say, ‘I’m not taking late payments; you must come up to date or we’ll repo your car.’

“It requires a high level of specificity or you risk court action,” he says. “And in the court of public opinion, you don’t want to look like someone who is abusing customers.”

The legal term for a repo is “loss recovery.” In effect, it is a “dispossession of property,” Edelman says. “My legal advice: take care.”

As an auto-auction owner, Lynn Weaver can easily spot the repossessed vehicles in the bidding lanes.

Compared to “a bunch of program vehicles of the same model and color, the repo cars are different colors and have different variations,” says Weaver of Harrisburg Auto Auction in Mechanicburg, PA.

He says lenders selling such repossessed cars are up front about their origins when putting the vehicles on the wholesale market.

With good reason.

“It doesn’t do us any good to sneak anything by anyone,” Neil Boardman of the Regional Acceptance Corp. says at a recent National Remarketing Conference in Las Vegas.

Adds Steve Norbut, vice president of dealer sales for Universal Special Auto Finance: “A national lender is not going to slide something by.”

Most repossessed cars are in pretty good shape, although “a few are tagged with a golf club or every window is broken out,” evidence of a former owner’s anger at the prospect of losing the vehicle, Boardman says. “On average, our vehicles are three years old and with 45,000 to 50,000 miles.”

Repossessed vehicles at auction include a broad mix of models, mileage and conditions because they come from an array of lenders financing various products and customers, says Manheim’s Webb.

Weaver says, “There is no stigma at all towards repo cars.”

Still, some wholesale buyers steer clear of them.

That includes Mike Cunningham, owner of Payless Cars and Trucks in Tucson, AZ. Almost always, he personally buys cars in his inventory.

That doesn’t include repossessed vehicles.

“I almost never buy repos,” says Cunningham. “People quit maintaining those cars longer before they quit making payments. I’m skeptical of any repo.”

sfinlay@wardsauto.com