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How voluntary repossession affects credit

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When you fall behind on your car payments, you risk the lender repossessing your vehicle. Some people choose to go the route of voluntary repossession—where they give back their vehicle voluntarily to reduce their debts. However, voluntary repossession can significantly impact your credit.

If you can’t afford your car payments anymore, it’s crucial to have a plan of action. You need to know about voluntary repossession, as well as any alternatives to it. 

What is voluntary repossession?

When you purchase a vehicle on a payment plan, you agree to repossession terms. These terms state that after a specific amount of missed payments (loan default), the lender has the right to take back your vehicle without going to court. 

On the other hand, an individual may choose “voluntary repossession” or “voluntary surrender.” This is when individuals voluntarily return their vehicle to the auto lender because they know they can’t make their payments any longer.

Voluntary repossession requires you to reach out to your auto lender and notify them of your intent to return the vehicle. You explain that you can’t afford your payments and arrange a time to drop off the car. 

But a voluntary repossession doesn’t wipe out your loan. Your auto lender will sell the vehicle on your behalf. Once it’s sold, they’ll provide you with a receipt showing the sale and apply that credit to your loan. You’ll still be responsible for paying the outstanding balance.

This outstanding balance of what you owe minus what the car was sold for is known as a “deficiency balance.” If there are any outstanding fees (late payment fees or prepayment fees), you’ll still have to pay these as well. 

After a voluntary repossession, if you can’t make the payments toward your deficiency balance, your debt can be sent to a collection agency. 

Does voluntary repossession protect your credit?

Unfortunately, a voluntary repossession still negatively impacts your credit. A voluntary repossession is considered a loan default and will show up on your credit report for up to seven years. But if you believe a repossession is inevitable, choosing this option can soften the blow to your credit and lower the total default. 

Additionally, after a voluntary repossession, you’ll still likely owe money to the lender from the deficiency balance and any outstanding fees. If you default on these payments, that can be sent to a collection agency, which will be another mark on your credit report. A lender may also choose to take you to court if you default on the outstanding payments, which can lead to your wages being garnished. 

Overall, any repossession will make you look riskier to lenders in the future—but a voluntary repo might make you look slightly better. Credit bureaus will note a voluntary repossession in your credit report, so future lenders can see you were proactive. If you apply for another car loan within the seven years after the initial negative item on your credit, expect to be approved at high interest rates only. 

Why would someone choose voluntary repossession?

If repossession seems inevitable, it’s still better to initiate it yourself. It shows that you understand the situation, are taking responsibility for it and are trying to get the lender what you owe them. A regular possession includes towing fees that are passed on to you when the lender sends a towing company to get your vehicle (without notice). If you act first and return the car willingly, you can avoid these fees. 

Some other benefits include: 

  • You avoid late fees racking up as you miss more monthly payments by cutting the process short and simply returning the vehicle. 
  • Your loan is reduced by the amount the lender sells the car for in a voluntary repossession, which can reduce the overall impact on your credit report. 
  • You reduce the hassle of dealing with a repossessor, which can be unpleasant and stressful. As the repossession can happen without notice, you don’t have to keep looking over your shoulder, wondering if it’ll happen today. 
  • And, again, you might look slightly better to lenders in the future than if you didn’t do it voluntarily. While a repossession might mean you’re denied an auto loan in the future, a voluntary repossession may mean a lender will consider you at a high interest rate. 

Alternatives to voluntary repossession

Overall, while voluntary repossession is better than repossession, it’s not an ideal solution. Whenever possible, consider whether other alternatives would work for you. 

Contact your lender

People fall into unexpected circumstances all the time. If you’re having trouble making your payments, let your lender know. Maybe you’ve temporarily lost your job but believe you’ll be able to get a new one soon. Or, maybe you had a medical expense come up that immediately takes a large portion of your income. Explain your situation and ask for help. Your lender may:

  • Change your loan terms so payments are lower
  • Delay one or more payments
  • Modify your payment schedule so it works better for you 

Sell your car

Check out car websites to get an understanding of how much your car is worth. If your vehicle is worth more than your remaining loan balance, it may be a good idea to try to sell your car yourself. With this approach, you can pay off your loan in full and find a vehicle that’s more in your price range. 

Note that if you choose this option, you may have to pay prepayment fees on your loan. 

Refinance

If your credit is relatively healthy, you may be able to refinance your loan. You can see if you qualify for a lower interest rate and an extension on the repayment period. Both of these changes will mean a lower monthly payment, which might be more reasonable for you. 

However, note that you’ll likely pay more interest over time if you refinance and go with an extended repayment term. 

Debt consolidation

Another option for people with a good credit score is debt consolidation. Some credit cards allow balance transfers from auto loans. If you can find a credit card that allows this and offers a zero percent interest promotion for a few months, you can make some real progress with your loan. You can repay your auto lender in full and make significant payments during the zero percent interest months. 

Note that with this option, there are a few caveats:

  • You have to be approved for the credit card and at a balance high enough to cover your auto loan.
  • You may have to pay a one-time balance transfer fee.
  • You have to look at the calculations of what will happen after the zero percent interest months are over. If the credit card spikes to an interest rate of 18 to 25 percent and you still have a significant balance left, this can be a costly option that might just put you back into a debt spiral. 

What can you do about a repossession on your credit?

Both a repossession and a voluntary repossession stay on your report for up to seven years. You can attempt to dispute the loan default if you believe there’s an error in the details. However, if the negative line item for your repossession is accurate, it can’t be removed. Your repossession will eventually fall off your credit report, but you can take action to improve your credit while you wait.

If you make payments on time and in full, keep debt low (or nonexistent) and have a healthy credit utilization ratio, you’ll see your credit score improve. And, by building these healthy financial habits, you’ll improve your ability to get better lending terms and reduce the risk of being in a difficult debt situation again.

Posted in Lending
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