Voluntary repossession: What you need to know

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In a Nutshell

If you’ve fallen behind on your car loan payments, a voluntary repossession — returning your car to your lender — may be an option. But your credit will likely take a hit, and you could still end up owing money on your auto loan. Consider alternatives like selling your car or seeing if your lender might be willing to change your loan terms.
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When you can no longer afford your car payments, voluntary repossession may seem like the best way to get your car loan off your hands.

But returning your car to your lender could have serious financial consequences, including your account going into collections and your credit taking a hit. Let’s take a look at the impact that a voluntary repossession can have on your finances, along with alternatives to consider before you hand over your keys.

What is voluntary repossession?

Voluntary repossession — also called voluntary surrender — means that you return your car to the lender because you can no longer meet the terms of your loan agreement.

Voluntary repossession is an immediate alternative to repossession, which is when the lender takes action to seize the vehicle once your loan is in default, per your auto loan agreement.

Repossession can be an emotional experience, because the repo company the lender hires can show up at your home at any time and take your vehicle without letting you know beforehand.

How does voluntary repossession work?

The first step is to let the lender know that you can no longer make payments and want to voluntarily surrender the vehicle. Then you can set up a time and location to return the vehicle and hand over the keys.

Note the date, location and contact information of the person with whom you left the car. This information could come in handy if your lender has any questions in the future.

How a voluntary repossession affects your finances

A voluntary repossession doesn’t necessarily rid you of all financial obligation. In fact, it could take its toll on your finances in a few ways.

You may still owe money to the lender

The lender may try to sell the vehicle to make up as much of the remaining balance of the loan as possible. You’ll be responsible for paying any balance after the sale, along with any fees, like late-payment or prepayment fees. If you aren’t able to pay, your account could be turned over to a collection agency, which would show up in your credit history. The lender might also take you to court, which could result in a portion of your income going to the lender to pay back the remaining balance you owe.

It will show up on your credit reports

A voluntary repossession — along with any resulting collections or court judgements — can remain on your credit reports for up to seven years as a derogatory mark. According to Experian, one of the three main consumer credit bureaus, your credit report will list “voluntary surrender” instead of “repossession,” which may do slightly less damage to your credit.

It could affect your ability to get a loan in the future

The negative impact to your credit may make it more difficult to get a loan down the road. If you do get approved, lenders will likely charge a higher interest rate due to the higher risk of defaulting on the loan.

Alternatives to voluntary repossession

Before you decide to turn in your car, consider whether any of these options could help improve your situation.

  • Contact your lender. Let your lender know you’re struggling to make payments. Your lender may be willing to change your loan terms so that your payments are more affordable. Some lenders might allow you to delay a payment or change your payment schedule. Be sure to get any new loan terms in writing.
  • Refinance your car loan. Work with your lender to see if you can refinance your loan. By renegotiating terms to get a lower interest rate and extending the repayment period, you might be able to lower your monthly payments to an amount you can afford. But keep in mind that a longer loan term means you’ll probably pay more interest over time.
  • Sell your car. You may want to try selling your car yourself — especially if the car is worth more than your remaining loan balance. You can then pay off the loan and look for a more affordable vehicle. Websites like Kelley Blue Book can help you find the current value of your car and set your selling price.

Next steps

A voluntary repossession should be a last resort. First, call your lender and explain the situation. Chances are good that they’ve helped other borrowers in your situation before.

If you can’t arrive at a solution with your lender and you’ve exhausted all other options, it may be time to consider voluntary repossession. It could help you avoid the stress that can come with the repo man showing up at your door, but remember that it will likely have a negative effect on your credit. So don’t make the decision lightly.

When it comes time to purchase a vehicle again, consider buying a less expensive make and model or a used car — both of these options could reduce your monthly payments. Paying with cash can also eliminate any worry about paying your monthly loan bill.

About the author: Laura Malm is a writer and editor with a bachelor’s degree in journalism and strategic communication from the University of Minnesota. She is passionate about financial literacy and helping others feel confident in th… Read more.