Falling behind on car payments can happen to anybody. Perhaps you lose your job or substantial expenses catch you by surprise. As soon as you realize you cannot afford your payments, it's time to do something. If you don't, the lender may repossess the vehicle.
When you get an auto loan, the vehicle that you purchase secures the loan and your lender can repossess the vehicle and sell it if you stop making payments. The sales proceeds go toward paying down your loan.
Taking the initiative and returning your car to your lender—also known as a voluntary repossession—might be a good option, but it's important to understand how the process works before you drop off the keys.
Understanding Voluntary Repossession
In a voluntary repossession, you return your vehicle to your lender when you are unable to make payments. You inform your lender you will not make payments going forward and that you want to surrender the car. Then, you schedule a time and place where you bring the vehicle (and a ride home), and you turn over the keys.
The process is voluntary because you request and arrange everything instead of waiting for your lender to come and get the vehicle. Just like with a repossession initiated by the lender, if the car sells for less than your balance, you'd still owe money to the lender.
Why Go Voluntary?
With a voluntary repossession, you eliminate the chaos and cost of dealing with a repo man.
In a nonvoluntary 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 situation: What if they take your car when you're far from home and you need to pick up your children?
Another lingering effect of repossession—whether voluntary or not—is damage to your credit. However, surrendering your vehicle voluntarily potentially can do less harm.
Impact on 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 primarily 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 even can rebuild your credit after repossession by getting new loans and paying them off over subsequent years.
A voluntary repossession is essentially 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 who reads through your report manually.
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.
For example, a loan officer at a small credit union might read through each item on your report. Computerized scoring models, on the other hand, probably won’t treat voluntary surrenders any differently.
Communication is Key
It’s wise to communicate with lenders when you’re having trouble with payments. Doing so opens the door to 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. Still, you might benefit more by giving the car back.
If you stop making payments, your lender will assume you intend to keep the car for as long as they let you. They’ll eventually send a repo man, and you’ll be stuck with all the costs. Even if repossession is your only option, it’s better to communicate.
Third-party outfits promising loan modification sometimes can make things worse. For a fee, they might promise to lower your payments or otherwise improve the terms of your loan, but you can't be sure they're even following through on their promises unless you have something in writing directly from the lender. So, it's best to work with the lender yourself and steer clear of middlemen who might be scam artists.
Selling the Car Instead
When your lender sells a repossessed car, it probably 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. Unfortunately, it may be difficult to sell the car.
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. To sell the car yourself, you’ll need to pay off the loan first—which is possible as part of a sale. Of course, if you had enough money to pay off the loan, you’d probably keep making payments. Selling the car on your own might be an option if you have cash available or a flexible buyer.