Will doing a voluntary reposession protect your credit?

When you buy a car, the last thing on your mind is how you’ll return it if you can’t make the payment. However, financial struggles can sometimes lead to tough decisions.

If you feel like you’re out of options, voluntary repossession might seem the only way out. But before you hand over the keys, you need to know what happens next. Will it ruin your credit? Will you still owe money? Are there alternatives that could be less damaging to your finances? Get to know the answers to these questions before you make any decisions.

What is voluntary repossession?

Auto loans are secured loans, meaning that in exchange for the money to purchase a vehicle, you sign an agreement stating that the lender can take it back if you don’t make the payments. This is called repossession. It’s often done without warning, leaving the borrower scrambling to deal with the consequences. Repossession is a serious financial event that can have long-term effects on credit and future borrowing power.

Voluntary repossession is when you choose to return your vehicle to the lender before they forcibly take it. It might sound like a better option than having your vehicle taken unexpectedly, but it’s not without consequences. While you’ll have some control over the process, it won’t erase your debt and may negatively affect your credit for years.

How does voluntary repossession work?

Voluntary repossession is a simple process. Here’s how it typically happens:

1. Call your lender: Let them know you can no longer make the payments and want to surrender your vehicle.
2. Schedule a return date: The lender will tell you where to drop off your vehicle.
3. Turn over the vehicle: Provide the lender with all keys, accessories, documents and manuals that came with the vehicle. You’ll sign documents acknowledging voluntary surrender, and the lender or repo company will take possession of the vehicle.
4. The lender sells the car: This is typically done at a public auction. The amount received is applied to the balance of the loan.
5. You pay any remaining balance: You’re responsible for the remaining balance of the loan, leftover interest and any costs the lender incurred for towing, storing, and selling the vehicle. If the vehicle sale isn’t enough to cover these costs, you’ll get a bill for the difference (known as a deficiency balance).
6. The lender reports the repossession: This information is passed along to the major credit bureaus and added to your credit report, which can drag down your score.

Potential benefits of voluntary repossession

No one wants to have their vehicle repossessed, but there are some potential advantages to doing it voluntarily.

Reduces stress and embarrassment

Repo agents can take your vehicle at any time, typically without warning. This could leave you stranded at an inopportune time.

Choosing voluntary repossession gives you control over when and where you return your vehicle, preventing the shock and frustration of finding it missing. Being proactive also allows you to handle the process discreetly, rather than dealing with a sudden and potentially public towing situation.

May help reduce additional fees

Involuntary repossession often comes with extra charges, including towing, storage, and repo agent fees. By voluntarily surrendering the car, you may avoid some of these costs, potentially lowering the overall financial burden.

Could appear more responsible to future lenders

Repossession leaves a negative mark on your credit, regardless of whether it is voluntary or involuntary. However, voluntarily returning the vehicle shows that you took the initiative rather than forcing the lender to track you down. Some lenders may view this as slightly less risky when evaluating future loan applications.

Drawbacks of voluntary repossession

While voluntary repossession may help you avoid some stress, the impact on your credit, finances and future borrowing options can be negative.

Damage to your credit score

A repossession can stay on your credit report for up to seven years and may significantly drop your score. This may make it more difficult for you to qualify for future credit or loans. If you do get approved, you’ll likely pay higher interest rates and get less favorable loan terms.

Deficiency balances

It’s common for repossessed vehicles to sell for less than the outstanding debt. If this happens, you’re responsible for the deficiency balance. This means you might still have to make payments, even though you no longer have the vehicle.

Potential legal trouble

If you don’t pay the deficiency balance, the lender can take legal action against you. This could lead to wage garnishment or collection efforts, putting even more strain on your financial situation.

How do you rebuild your credit after voluntary repossession?

While a repossession will have a significant and lasting impact on your credit, it’s not necessarily the end of the road. With the right steps, you can work toward improving your financial standing over time.

1. Plan to pay the deficiency balance. There’s a good chance you may owe a deficiency balance. Plan ahead for how you’ll pay this off. Settling the debt can help prevent further damage to your credit.
2. Check your credit report. After the repossession, review your credit report to confirm the information is accurate. If there are errors, dispute them with the credit bureaus.
3. Make on-time payments on other debts. Your payment history makes up a large portion of your credit score. Start rebuilding your creditworthiness by focusing on making timely payments on credit cards, loans and other financial obligations.
4. Start rebuilding your credit. Products like secured credit cards and credit builder loans are designed to help people with poor or damaged credit rebuild their scores. Using them responsibly can show lenders that you’re improving your financial habits.

What are alternatives to voluntary repossession?

If you’re struggling to make vehicle payments, repossession isn’t the only option. Before you hand over your keys, explore these alternatives to see if one might work better for your situation:

• Refinance your loan. A lower interest rate or extended repayment period might make payments manageable again. However, you’ll likely only be able to get more favorable terms if you have a higher credit score. If you think you’re going to have problems, it’s best to take this step early.
• Sell the car yourself. You may be able to sell the vehicle for at least what you owe, then use the proceeds to pay off your auto loan.
• Negotiate with your lender. Some lenders may let you skip a payment, lower your interest rate or restructure your loan if you ask and can explain you’re going through a temporary hardship.
• File for bankruptcy. In extreme cases, bankruptcy might help eliminate or restructure multiple debts, including your auto loan.

Before making a decision, consider reaching out to a financial advisor or credit counselor for guidance. An expert can help map out a plan to manage your debts and improve your financial outlook.

The bottom line

Deciding to voluntarily surrender your car isn’t easy, and it’s not a decision to take lightly. While it may seem like a quick fix to an overwhelming financial burden, the reality is that it can leave a lasting mark on your credit and finances. You could also end up owing money even after the car is gone.

Before you take this step, make sure you’ve explored all other options — selling the car yourself, refinancing or working out an arrangement with your lender. If voluntary repossession is your only option, approach it with a plan to minimize the damage and start working toward financial recovery as soon as possible.

Frequently asked questions

• Is voluntary repossession a good idea?

  It depends on your situation. If you truly can’t afford your payments and have no other way to resolve your debt, involuntary repossession may be the best of bad options. However, due to the potential drawbacks, it’s often considered a last resort.

• Can I get a voluntary repossession off my credit?

  Unfortunately, a voluntary repossession stays on your credit report for seven years and can’t be removed early unless it’s reported in error. However, you can work to rebuild your credit by making on-time payments on other accounts and keeping your balances low.

• Can I give my car back to the dealership if I still owe?

  Not usually. The dealership is not the lender, so returning the car to them won’t cancel your loan. You need to work directly with your lender to arrange a voluntary repossession or explore other options like selling the car or refinancing.

• Will voluntary repossession prevent me from getting another car loan?

  It will make it much harder, but not impossible. Lenders will see the repossession as a red flag. If you do get approved for another car loan, expect much higher interest rates and less desirable terms.