How Does Voluntary Auto Repossession Affect Your Credit?

How Does Voluntary Auto Repossession Affect Your Credit?

If you can no longer afford your car payments, couldn’t you help your credit score by voluntarily surrendering your vehicle?

This is a common misconception. Voluntary repossession can be less stressful and less embarrassing, but giving the vehicle back to the lender or dealership has the same effect on your credit as a forced repossession.

Either way you’re defaulting on an auto loan and your credit score will suffer.

That being said, if repossession is inevitable, you may still prefer voluntary repossession. So let’s discuss how voluntary repossession affects your credit.

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Avoid Car Repossession If Possible

You should do everything in your power to avoid repossession in the first place.

Often, borrowers who are struggling with their car payments do not want to acknowledge the problem. They think they’ll find a way to resolve the financial stress next month or the month after that.

Meanwhile, the late payments, missed payments, and fees pile up, making the problem worse. Slowly, the situation builds until auto repossession becomes the only alternative.

Your Auto Lender Wants to Help

Asking your creditors for help goes against human nature, but when you find yourself behind on the bills and unable to keep your car loan up to date, you should call your financial institution as soon as possible.

Your lienholder does not want to repossess your car. Getting your vehicle back costs them money — more money than they’d spend helping you find more favorable loan terms.

Lenders want you to succeed so you can keep paying them money every month!

As soon as you realize you’re in dire financial straits and can no longer afford your car payment, give your lender a call. Be honest and forthright and ask for help.

Many lenders will offer deferred payments or new loan terms. Refinancing over a longer term could lower your monthly payments even if you can’t improve your interest rate.

Agreeing to new terms or putting off payments will also affect your credit but not nearly as much as an auto repossession.

The very best way to avoid auto repossession is to budget appropriately to prevent future problems. Make sure you can afford the car payments you’re taking on before you sign the paperwork. Write out your debt obligations and income and ensure there’s still a bit left over.

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When To Start Voluntary Repossession

If it’s too late and you can’t avoid repossession, just take a deep breath. It’s going to be alright. Your first step is still to call your lender to ask for help. If the lender can’t help, then voluntary repossession is the best-case scenario.

Benefits of Voluntary Repossession

Even though it won’t help your credit, a voluntary surrender of your vehicle still has benefits:

  • Lower Fees – When lenders take your car back for non-payment, they have to send a tow truck to pick up your car. Your lender will tack on the towing charge to your balance due. A voluntary surrender at least avoids these extra fees.
  • Timing – The tow truck driver won’t be too worried about your schedule. He or she will pick up your car even if it’s not a convenient time or place for you. Voluntary repossession allows you to choose when and where you have to leave your car.
  • Credit Report – All repossessions negatively affect your credit history. However, it is possible that a voluntary repossession is slightly better. This depends on the lender and the credit reporting agency

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How Does Voluntary Repossession Affect Your Credit Score?

Voluntary or involuntary repossession is terrible for your credit. When your auto lender reports the repossession to the credit bureaus such as Experian and TransUnion, you should expect a much lower credit scoresometimes as much as 100 points lower.

This hit comes from the repossession alone. It doesn’t include the effects of any late payments you still have outstanding as your car was on its way to repossession.

Keep in mind, too, that each one of these missed payments and the repossession request could be listed as separate lines on your credit report.

This looks very bad to a lender, who may not be discerning enough to see whether you had your car repossessed or turned in the keys yourself.

Worse still, the repossession will stay on your credit report for seven years and you will have a difficult time getting another car loan with the blemish still present.

This bad credit affects more than just cars. Getting credit to buy or refinance anything in the future could be extremely difficult, especially lines of revolving credit like credit cards. Even when you can get approved for a loan, the higher interest rates could make borrowing way too expensive.

Finally, after all is said and done — whether you had a voluntary or an involuntary repossession — you may still owe the lender money! If your remaining balance was $10,000 and your car sold for $8,000, you still have to pay back that $2,000 deficiency balance.

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Paying Off The Deficiency Balance

Repossession doesn’t eliminate your debt if the lender can’t pay off your loan by selling the car. Your monthly loan payments may not continue but you’ll still be on the hook for the remainder of the loan, and you won’t even have a car to show for it!

Your lender may wash its hands of the situation by sending the debt to a collection agency. If you don’t pay the balance, the collection agency and/or the lender could initiate a wage garnishment through the court system. The money would come out of your paycheck before you even get paid.

Keep in mind too that the company tasked with collecting your debt will also mark your credit report.

So now, you have your lender marking your report with delinquent charges, a repossession, and the debt collector reporting that they are actively collecting the loan balance you still owe.

It’s a tough situation for anyone.

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How To Avoid Auto Repossession

Avoiding repossession begins when you buy the car. Make sure you’re buying a car with a payment plan you can afford. If the car payment would be a challenge even when you’re doing well financially, imagine how hard it would be to pay during a challenging month.

Plan Ahead When You Buy

Nobody can predict the future. Layoffs, illnesses, unexpected financial challenges — these things happen. If you can plan ahead by keeping enough money in your bank account to pay for at least three months of living expenses, you can limit the likelihood of a repossession.

Here are some other ways to avoid repossession by making good decisions when you buy the car:

  • Buy a Used Car: A used car likely costs less than a new car which could lower your payments considerably.
  • Make a Down Payment: A down payment can lower your payments and make selling the car easier later.
  • Insist on the Best Rate: Interest rates determine the amount of your car payments. Your credit history helps determine your rate, but you could still haggle for a better rate. It never hurts to ask your auto lender for the best rates.
  • Don’t Finance the Car: Could you pay cash for a used car? Doing this keeps the repo man off your back because you own the car outright. Plus you’ll owe no loan payments and can put that money into fixing up your vehicle or saving for another car.

Communicate With the Lender

Once you have taken out a car loan and have started making payments, you probably feel stuck with the terms of your loan.

But if you’re struggling with the payments, talk to your lender right away. Your lender wants to work with you — not because of its kind heart but because it has a financial interest in helping you repay the loan. This is true for all sorts of financial services.

You probably won’t get a lower interest rate but you could possibly refinance the vehicle to lower your monthly payments. Lenders also have other ways to help. Some let you skip a payment.

Sell the Car Yourself

When you’ve exhausted all possibilities and there’s no way you can catch up on your car loan, repossession is probably inevitable.

Unless you can sell the car yourself and use the proceeds to pay off your loan.

This can salvage your credit, especially if the proceeds for the car are worth more than your loan — which could be the case if you made a down payment or financed the car over a short period of time.

If you can’t sell the car for enough money to pay off the loan’s remaining balance, you’d need to come up with the remainder of the cash another way. You couldn’t sell the car to a new buyer if your current lender still holds the title — and the lender won’t relinquish the title until you make a lump sum payoff of the loan.

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Conclusion

Voluntary repossession is detrimental to your credit score. Your bad credit that results will make borrowing money for another car nearly impossible.

With no other options, however, a voluntary surrender of your vehicle can reduce costs and give you some control over the process.

Still, you should try to avoid any type of repossession at all costs. Working with your lender or even selling your car yourself is preferable to letting them repossess your car.

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Spenser Smith

About Spenser Smith

Spenser is a finance writer living in Philadelphia, PA where he works for a financial services company, specializing in consumer credit. Spenser holds both a bachelor's and master's degree in economics.

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