Voluntary Repossession: Lower Cost, Less Chaos

Handing Over the Keys
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It can happen to anybody. Perhaps you lost your job, or large expenses have caught you by surprise. As soon as you realize that your car payments are too high, it's time to do something.

Returning your car to your lender, also known as voluntary repossession, might be an option. But it's important to understand how the process works before you drop off the keys.

What Is Voluntary Repossession?

When you get an auto loan, the vehicle that you purchase secures the loan.

In other words, your lender can take (or "repossess") the vehicle and sell it if you stop making payments. The sales proceeds pay down your loan and you can stop making payments, but the loan might not get paid off completely (which means you'd still owe money).

The process is voluntary because you request and arrange everything instead of waiting for your lender to come and get the vehicle.

Why go Voluntary?

In a standard repossession, lenders send a repossession agent to collect the vehicle – and you never know when that will happen. The agent might get the vehicle from your home, your work, or wherever you leave it parked (repossession agents can follow you, or they might use GPS to locate the vehicle). If you're not ready to hand over your car, this can be an anxiety-producing and inconvenient event: what if they take your car when you're far from home and you need to pick up your children?

Having a car repossessed can also be expensive.

With a voluntary repossession, you eliminate the chaos and cost of dealing with the repo man. You simply inform your lender that you will not make payments going forward, and that you want to surrender your car. You set a time and place, you bring the vehicle (as well as a ride home), and you turn over the keys.

Keeping costs low is a good thing – things don’t just end when the car is gone. You’ll still have to pay any deficiency balance, which consists of the unpaid loan balance (after sales proceeds are applied), costs of repossessing the car, storage and preparation fees, and more.

Another lingering effect of repossession – whether voluntary or not – is damage to your credit. However, surrendering your vehicle voluntarily can potentially do less harm.

Will Repossession Hurt your Credit?

Your credit will suffer any time you default on a loan. Credit scores try to determine whether or not you’ll stop making payments, and they base the prediction largely on whether or not you’ve done so in the past. But nothing is permanent: defaults typically fall off your credit reports after seven years, and your scores should start to improve within a few years of repossession. You can even rebuild your credit after repossession by getting new loans and paying them off over subsequent years.

A voluntary repossession is basically the same thing as an involuntary one: a defaulted loan. Either one will drag down your credit scores. But there is a slight difference: a voluntary surrender shows up differently on your credit reports, and that might matter to somebody (a loan officer at a small credit union, for example) who reads through your report manually.

Computerized scoring models, on the other hand, probably won’t treat voluntary surrenders much differently.

If anybody tells you that a voluntary repossession won’t hurt your credit, evaluate what biases that person has. Will they benefit financially (by selling you a product or service, for example) if you decide to take your car back? If so, get advice elsewhere.

Communication is Key

It’s a good idea to communicate with lenders when you’re having trouble with payments. Doing so opens the door for alternatives (and voluntary repossession is just one alternative available). If you are proactive, you might find that your lender is willing to work with you – they’ll earn more if you keep the car, even if they have to modify the loan by lowering your payments or interest rate. Even still, you might benefit more by giving the car back.

If you simply stop making payments, your lender will assume you intend to keep the car for as long as they let you. They’ll send a repo man (and Murphy’s Law says he’ll arrive at the worst possible time), and you’ll be stuck with all the costs. Even if repossession is your only option, it’s better to communicate.

What about companies that offer to negotiate with your lender for you? Be careful. Your best option is to work directly with your lender; third-party outfits promising loan modification can sometimes make things worse.

Sell the Car?

When your lender sells a repossessed car, it won’t sell for the best price possible. Lenders are required by law to get a decent or "commercially reasonable" price, but that’s probably less than you’d get if you sold the car yourself.

The challenge is that your lender has a lien on the vehicle, so you can’t transfer the title to a buyer until you get the lien cleared. In order to sell the car yourself, you’ll need to pay off the loan first. Of course, if you had that kind of money you’d probably just keep making payments, but it might be an option if you have cash available and just want to get out of the loan.

Keep the Car?

When faced with repossession, there are a few ways out. You can keep your car (or get it back) if you redeem the vehicle or reinstate the loan, and you might prevent repossession by filing for bankruptcy and getting protection under an automatic stay.