When you fall behind on your auto loan payments, the lender has the right to take possession of your vehicle. This is called repossession and because of the terms of your loan, the lender can do this without having to go to court.
But, when you take your vehicle back to the lender or dealership before they send the repo man for it, that’s called voluntary repossession. You might consider voluntary repossession if you can no longer afford your auto loan payments and other options aren’t viable. The major benefit of a voluntary repossession is that you won't have to face the auto lender's cost of repossessing the vehicle.
Voluntary Repossession Can Reduce Fees
When a lender repossesses your vehicle, they don’t knock on the door and ask for the keys. Depending on the state's law, the auto lender can have your vehicle repossessed at any time, without notice. They can also come onto your property to do so.
They won't contact you to ask what's convenient for you. A towing service takes the vehicle to a storage place. Both these services have fees that the lender passes on to you. You can avoid having these fees tacked onto your outstanding balance by voluntarily surrendering your vehicle.
Voluntary Repossession Affects Your Credit
Payments you’ve missed leading up to your voluntary repossession will go on your credit report. Then, the repossession itself will also go on your credit report. Both pieces of negative data will remain on your credit report for seven years.
Your credit score will take a hit, but the exact amount of damage depends on the other information on your credit report.
Don't give up on your other bills. Your credit score can rebound from a voluntary repossession if you continue making all your other payments on time.
Voluntary Repossession Doesn’t Cancel out Your Loan
Turning in your vehicle doesn’t let you off the hook for your auto loan. The lender will auction or sell your vehicle and apply the sale proceeds to your loan. If the sale price is less than your loan balance, you’re still responsible for the remaining balance. For example, if you owe $5,000 and the vehicle sells for $3,500, you will still owe $1,500.
The lender may turn the debt over to a debt collection for further collection on the balance and the collector may also place the debt on your credit report. The lender may sue you for the debt and if they win a judgment they may also get court permission to garnish your wages for the remaining balance.
In some states, the lender may be able to gain a deficiency judgment for the loan amount that's still due after the vehicle has been auctioned.
Getting Another Vehicle May Be Difficult
Because of the damage voluntary repossession does to your credit, you’ll have a harder time getting new wheels. It’s not likely that another lender will approve you for a vehicle loan when the repossession is fresh on your credit report and especially while you still have an unpaid, delinquent auto loan balance.
Your options will be limited to a “Buy Here, Pay Here” type of dealership that has less stringent credit standards, but with higher prices, higher interest rates, and higher monthly payments. Or, if you’re able to save up enough, you can buy a car from a used car lot or a private seller.
You May Be Able to Keep Your Vehicle
You have to take action as soon as you start feeling the pinch of making your monthly loan payments. Once you miss a payment, catching up gets harder and, in some states, all it takes is a single missed payment for the lender to repossess your vehicle. It also depends on the terms of your contract.
- Work on your finances. Create a budget to make sure you’re maximizing the money you bring in each month. Review your spending and look for areas that you can cut back to better afford your car payments.
- Take on a part-time job. A second (or third job) may leave you with less free time, but the extra funds can help save you the long-lasting credit damage that comes from a voluntary repossession. A money-making hobby or small side business is another option for bringing in extra cash.
- Refinance your auto loan. If your credit is still in good shape, you may be able to get a new loan, with a lower, more affordable monthly payment.
Refinancing for a longer repayment period could result in more interest overall.
If you can't afford to keep your vehicle, consider selling it and using the money to pay off your car loan. Note that if you sell for less than your loan balance, you may have to come up with the difference to transfer the title to the new owner.