A vehicle is an important asset, especially for those with challenging commutes. Unfortunately, vehicle costs continue to steadily rise, with average monthly car payments rising to $725 for new vehicles. With increased expenses, it’s easy to fall behind on car payments.
If you are having a hard time keeping up with a car loan, voluntary repossession may be a good option to get the burden of late payments off your hands. Although there are financial consequences, it can be a sensible decision compared to the other options available.
Key takeaways:
- If you are late on car payments, voluntarily returning your vehicle can reduce fees and show responsibility to your lender.
- Voluntary repossession damages your credit score, and you may still owe money if the vehicle sale doesn’t cover the loan balance.
- Other options like refinancing or selling the vehicle should be carefully considered before choosing repossession.
What Is Voluntary Repossession?
Voluntary repossession involves proactively returning a financed car to the lender rather than forcing the lender to seize it back once your loan is in default.
When you can no longer afford car loan payments, and other alternatives such as refinancing, negotiating with the lender, or selling the vehicle are not possible, voluntary car repossession allows you to maintain some control of the situation while addressing your financial situation.
How Does Voluntary Repossession Work?
Voluntary repossession may be a way to negotiate better terms with your creditors. However, before initiating the process, you should confirm it is the best option for your situation.
If you decide to move forward, notify your lender that you’re unable to make payments and plan to surrender the vehicle voluntarily. Request details about the process, including when, where, and how to return the vehicle and any required documentation.
It pays to be transparent about your financial situation and show you’re proactive and willing to address the issue responsibly. Make sure that the lender notes on your credit report that the repossession was voluntary rather than forced so future lenders may view the situation more favorably.
Here are the steps typically involved in the voluntary repossession process:
1. Prepare the Vehicle
Clear the car and ensure it is in good working order to avoid additional charges for damages or repairs. The vehicle must be functional and free from significant damage beyond normal wear and tear.
- Inspect and document the vehicle condition: Thoroughly clean the interior and exterior of the car to return it in the best possible condition. Take photos to document the car’s condition at the time of the return. Note the odometer reading.
- Repair basic issues: Address minor repairs, such as replacing missing items or applying touch-ups to scratches, but avoid significant spending.
- Remove personal items and modifications: Check all compartments (glove box, trunk, under seats) for personal belongings and remove them, as well as any modifications you made to the car.
- Collect vehicle documents and accessories: Provide the owner’s manual, registration, title, and any service records the lender requires. Gather all sets of keys, fobs, and any accessories that came with the car and should be returned.
2. Return the Vehicle
Return the car to the agreed-upon location and provide the keys, title, and any other documents your lender requests. Be sure to ask for a receipt or confirmation of the surrender for your records.
3. Vehicle Inspection
The lender will assess the vehicle’s condition and value before typically selling it at auction or through other means. Proceeds from the vehicle sale are applied to your loan balance.
Pros of Voluntary Repossession
Voluntary repossession isn’t an easy decision, but it can be a more manageable way to deal with costly loan payments while minimizing additional costs and stress.
Control of Situation
If you can’t make your car payments and other options such as refinancing your loan, deferring payments, and selling your vehicle aren’t possible, voluntary repossession may be a good choice to maintain some control over the situation. You choose when and where to return the vehicle, reducing the stress and embarrassment compared to having it seized by the lender.
Additionally, if you have filed for bankruptcy or are in the process of filing, this can simplify the voluntary repossession process and provide more favorable options.
When you file for Chapter 7 and surrender your car to the lender, the debt will become unsecured and be erased from your record. If you file for Chapter 13, you may be able to make smaller, more manageable payments on your car once your debt has been restructured.
Lower Costs
Proactively surrendering your vehicle can help you avoid additional costs like towing, storage, and impound fees incurred during an involuntary repossession. In a best-case scenario, the lender may be willing to negotiate lower fees to avoid these costs altogether.
If you wait for the lender to repossess your vehicle, they can show up and tow your car at any time, potentially leaving you stranded. By voluntarily returning the car, you can ensure the lender receives it in good condition, reducing the risk of additional charges for damages that may happen during an involuntary repossession.
Cons of Voluntary Repossession
Although voluntary repossession may be an attractive solution given your particular situation, it still has significant downsides to consider.
Debt Remains
Even after surrendering your vehicle, you may still owe the lender a deficiency balance if the earnings from the vehicle sale don’t completely cover your remaining loan balance. Lenders may pursue legal action to recover this debt, including wage garnishment or lawsuits.
Sometimes, the lender might add fees for the sale process, increasing the amount owed.
Credit Damage
Does voluntary repossession hurt your credit? Although creditors may view it as more favorable than involuntary repossession since it reflects a willingness to resolve your debt, it still has a negative impact on your credit score.
So, how does voluntary repossession affect your credit report? A repossession can last on your credit report for up to seven years from the date of your first missed payment, which can make it difficult to obtain future loans for a while.
However, compared to the impact of an involuntary repossession, the bad credit may age off sooner and be easier to rebuild over time.
Temporarily Limited Future Options
A repossession record on your credit report is seen as a risk to lenders, which can severely limit your future borrowing options. Negative information on your credit report typically lasts for up to seven years, making it harder for you to qualify for new loans, mortgages, or credit cards as you work to rebuild your credit.
Consider All Your Options
Before deciding on voluntary repossession, you should assess its long-term impact on your finances and credit and carefully evaluate other options to ensure it’s the best choice for your financial situation. You may want to consider consulting a financial advisor or seeking legal advice before initiating the process of returning your vehicle.
Alternatives to Voluntary Repossession
Returning your car might not be possible, depending on your particular case and financial standing. Car repossession loopholes for when you are “underwater” on a car loan include:
1. Negotiate With the Lender
Being honest and proactive with your lender can yield some beneficial outcomes. Discuss options such as loan modification, payment deferral, or forbearance, which can relieve current financial pressures while you deal with your situation.
2. Refinance the Loan
Consider refinancing your car to obtain a new loan from a separate lender with better terms (lower interest rate, extended loan term, etc.) to pay off the existing loan. You can also talk with your current lender about internally refinancing under more favorable terms.
3. Sell the Vehicle
If possible, selling the car yourself often yields more money than the lender would receive through auction. You could then use the proceeds from your private sale to pay off the overdue loan balance.
3. Downsize Your Vehicle
Ask your lender if you can trade down your current vehicle for a less expensive one, rolling your remaining balance into a new, more manageable loan.
All options have unique pros and cons, so proceed with a clear understanding of your financial goals.
Improve Your Financial Standing
Voluntary repossession is not an easy choice and comes with financial consequences. However, consistent effort can help you rebuild control, reduce debt, and get a repossession off of your credit to boost your score over time.
If you haven’t checked your credit in a while, get your free credit report card from Credit.com.
