Disclosure regarding our editorial content standards.
Voluntary repossession is when someone can no longer afford their car payments and must surrender their vehicle. Instead of having your lender repossess the car, you can give it up voluntarily. People usually do this when they have fallen behind on auto loan or lease payments.
The only difference between a voluntary repossession and a regular repossession is that you’re giving up the car yourself, instead of having a repo person come and get it.
Many people choose to do a voluntary repossession because they feel that they’re saving the collection agency time by giving up the car themselves. In turn, they believe that they’ll be in much better standing with creditors or debt collectors. However, the truth is more complicated than that.
There are some small benefits to voluntary repossession—such as saving money on towing fees and other costs associated with repossessing a vehicle—but there are also several downsides.
Before you drop off your keys, it’s important to understand exactly how voluntary repo works.
Let’s say you owe $20,000 on your car. If you can no longer pay your car loan payments and decide to surrender it, you would call your lender to tell them that you can no longer afford your payments and need to surrender your car. You would then schedule a date, time and place to hand over your vehicle.
Once you've turned your car in, your creditor may decide to keep it as compensation for your debt or sell it in either a public or private sale. In some states, your lender is required to let you know what will happen to your car.
For example, if they choose to sell the car at public auction, state law may require that they tell you the date of the sale so that you can attend. It's important to attend, if possible, so you can make sure they try to sell your vehicle in a commercially reasonable manner to get the best price.
If the vehicle is sold privately, you may have a right to know the date it will be sold. Depending on state law, failure to sell the car in a commercially reasonable manner may give you either a claim against your lender for damages or a defense against a deficiency judgment—a court order mandating you to pay the debt you owe.
If the price the vehicle sold at does not recoup what you owe, then you will have to pay the remaining balance. This is called a deficiency balance. A deficiency is any amount you still owe on your contract after your creditor sells the vehicle and applies the amount received to your unpaid balance.
Before you hand in the keys to your car, it’s important to explore all options available to you. There are a number of alternatives to voluntary repossession that may be better for your situation.
Before committing to a voluntary repossession, you should always contact your lender first and consider all of the options in front of you. List out the pros and cons of each and consider your current financial state before making any commitments.
Many believe that by voluntarily returning your car, the damage to your credit will be less severe. However, giving a car back can be just as detrimental to your credit as involuntary repossession. A voluntary surrender will show up differently on your credit report, but the effect can be the same, and the item may be listed on your credit report for up to seven years
A voluntary repossession will also cause a drop in your credit score. Just like any time you default on a loan, when you fall behind on car payments, your credit score will also drop—and it can drop more than 100 points, depending on your specific circumstances. This is a result of the repossession alone, and it doesn’t include your outstanding late payments. It may take years for you to rebuild your credit.
Committing to a voluntary repo can do more than affect your credit history. It can also hurt your ability to buy a car in the future, and much more.
Repossession doesn’t eliminate your debt right away. While the lender will most likely sell your vehicle to make up for some of your debt, you may still end up owing. If your remaining debt was $15,000 and your car only sold for $10,000, you would still have to pay back the deficiency balance of $5,000.
Because of the impact voluntary surrender has on your credit, it could be harder for you to get a loan in the future. If you do get approved, the lenders will likely see you as a higher risk and therefore charge a higher interest rate.
Because of the financial repercussions and potential impact on credit, a voluntary repossession should be thought through thoroughly. Look for other debt solutions before you surrender your car. You never know, you may be able to keep it!
If you need help fixing your credit or want to learn more about credit in general, our team of advisors can help. You can sign up here for more information.
