Voluntary repossession occurs when a borrower returns their vehicle to the lender or finance company before the loan is fully paid off. This typically happens if the borrower is unable to make the required payments towards the loan.
While voluntarily surrendering your vehicle is better than letting your loan go into default and letting your lender seize the car, it can still have a significant negative impact on your credit.
How Does Voluntary Repossession Work?
If you’re unable to make payments towards your auto loan and you default, the lender or finance company may repossess the vehicle in order to recoup their losses. This process is known as involuntary repossession.
Voluntary repossession, also known as voluntary surrender, on the other hand, occurs when you initiate the process and return the vehicle to the lender before your loan goes into default and the vehicle is seized.
How Does Voluntary Repossession Affect Your Credit?
While voluntary repossession may seem like a more proactive approach to dealing with a vehicle loan that has become unaffordable, it can still have negative consequences for the borrower’s credit score.
When a borrower misses loan payments or defaults on a loan, the lender will typically report this information to the credit bureaus, which results in delinquencies appearing on the borrower’s credit report.
Similarly, when a borrower voluntarily surrenders their vehicle, the lender may still report this information to the credit bureaus, which can have a negative impact on the borrower’s credit score.
This is considering that your payment history is the most important factor affecting your credit. In fact, your history of making payments, timely or otherwise, accounts for 35% of your FICO credit score.
Voluntary Repossession Can Affect Your Finances
Voluntary repossession may also result in financial costs for the borrower. If the value of the vehicle is less than the amount owed on the loan, the borrower may be responsible for paying the difference. This balance is known as a “deficiency balance.”
If you’re already struggling to make loan payments, voluntarily surrendering your vehicle can lead to an even bigger financial burden. Note that voluntary repossession is not the same as simply returning the vehicle to the lender.
If you simply return the vehicle without arranging for the loan to be paid off or negotiating with the lender, this may be considered theft and can lead to serious legal consequences.
Should You Voluntarily Surrender Your Car?
If you’re considering voluntary repossession, it is important to carefully consider the potential consequences and to seek professional advice, such as from a financial advisor or attorney.
In some cases, there may be alternative options that can help you avoid repossession. For example, you can negotiate with your lender to modify the loan, such as by extending the loan period or lowering the monthly payments.
Conversely, you may consider selling the vehicle and use the proceeds of the sale to pay off the remaining balance of your loan. Other alternatives will be to refinance the loan, get a debt consolidation loan, or trade in the vehicle for a less expensive one.
The Bottom Line
Not only can voluntary repossession have a significant impact on your credit score but may also result in financial costs, which can impact your ability to cover other debt obligations, leading to further credit damage.
If you’re struggling to make loan payments, seek professional advice and consider options such as negotiating with the lender or seeking financial assistance. You can also look to credit restoration to help protect your credit.
Call us at 888-799-7267 to schedule a Free Credit Consultation.
