How Does a Voluntary Repossession Impact Your Credit?

What Is Voluntary Repossession?

A voluntary repossession occurs when you return your car to your lender or leasing company because you can no longer afford the auto loan payments. You'd typically contact your lender and make arrangements to return the vehicle, or reach out to your debt collector if your auto loan was sold to a third-party collection agency. After the surrender, your lender may keep the car or sell it to satisfy your loan balance.

Voluntary vs. Involuntary Repossession

A forced repossession happens when your lender or leasing company seizes your vehicle after you default on auto loan payments. The creditor can send someone at any time of the day or night to take the car, which can be distressing to experience. The late payments that led to the repossession, along with the repossession itself, can seriously damage your credit.

Voluntarily handing over your car is often less stressful because you'd typically surrender it during business hours rather than waiting for someone to take your car. It's also slightly better for your credit and cheaper than a forced repossession.

How Does Voluntary Repossession Affect Your Credit?

A voluntary repossession can negatively impact your credit because it shows you failed to repay your auto loan as agreed. The surrender and late payments can remain on your credit report for seven years from the date you stopped paying your loan.

Additionally, if the lender sells the vehicle for less than you owe and you don't pay the remaining balance, it may send the debt to collections. Both the original account and collection account may remain on your credit report for up to seven years from the original delinquency date.

The surrender, late payments and collection account on your credit history can also make it harder to qualify for financing in the future. And if you are approved for another loan, you may receive a higher interest rate and less favorable loan terms.

However, the impact to your credit may be less severe than a forced repossession. It shows you cooperated with your lender and initiated the return yourself.

Other Potential Consequences of Voluntary Repossession

In addition to credit damage, a voluntary repossession may result in other consequences, including:

• Liability for remaining loan balance: You're typically responsible for paying the difference between what you owe on the auto loan and the amount your lender gets for selling the car. This is called the deficiency balance.
• Fees: The lender may charge you late payment fees and other costs, though they may be cheaper than you would pay with a repossession.
• Collections: If you don't pay the deficiency balance and any fees the lender charges, the lender may turn your account over to a collection agency. This may be more complicated to sort out and can further damage your credit.
• Lawsuit: Your lender or the debt collection agency can file a lawsuit against you to recoup the deficiency balance. This may result in wage garnishment, a levy against your bank account or a lien against your other property.
• Higher interest rates: If the voluntary repossession caused your credit score to drop, you might not qualify for the best terms on other credit cards and loans you apply for in the future.
• Higher insurance premiums: Your car insurance company may consider you more risky to insure after a car repossession, which could translate to higher insurance premiums.
• Impact to cosigner: The voluntary surrender, late payments and any collection accounts will also have a negative impact on your cosigner if you have one on the auto loan.

Alternatives to Voluntary Repossession

Voluntarily surrendering your vehicle may save the lender the cost and effort of repossessing it, but it generally has a similar effect on your credit. Before giving up your vehicle, consider whether one of these alternatives could make the loan more manageable:

• Ask about payment assistance. Contact your lender if you're financially struggling and ask about temporary payment extensions, deferments or other hardship options.
• Request a loan modification. If you can demonstrate the ability to make future payments, your lender may agree to extend your auto loan term or reduce your interest rate, which can lower your payments.
• Refinance the auto loan. Refinancing involves replacing your loan with one that has a lower interest rate or longer repayment term, which could make your payments more affordable.
• Sell the vehicle privately. A private vehicle sale may bring in more money than the lender would receive at a repossession auction. If the sale price is less than your loan payoff amount, however, you'll need to cover the difference.
• Trade in the vehicle. You may be able to buy a new, less expensive car and trade in the old vehicle. But be cautious about rolling negative equity into the new loan, which increases the amount you borrow and could leave you further underwater.
• Adjust your budget. If you can cut expenses and lower your bills, you can use the extra money to catch up on payments and keep the vehicle. This may be possible if the financial setback is temporary.

Your lender may be more willing to discuss solutions before you fall far behind. Review the cost and credit consequences of each option before deciding whether to surrender the vehicle.

Frequently Asked Questions

The Bottom Line

A voluntary repossession may be less stressful and less expensive than having your vehicle taken, but it can still have serious financial consequences. You may owe a deficiency balance after the lender sells the car, and the repossession can remain on your credit report for seven years. Contact your lender as soon as you think you may miss a payment. You may have options that limit the damage to your finances.

If you're not sure where your credit stands, you can check your credit report and FICO^® Score^Θ for free with Experian.