Voluntarily returning your car to the dealership, also known as voluntary repossession or voluntary surrender, can seem like a proactive solution when you’re struggling with car payments. But could this action still lead to a repossession on your credit history? Understanding the nuances of voluntary repossession is crucial for making informed decisions about your vehicle and finances.
What is Voluntary Repossession?
Voluntary repossession happens when you, as the borrower, willingly return your car to the lender because you can no longer keep up with payments. This is often seen as an alternative to waiting for the lender to initiate a involuntary repossession, where they seize the vehicle without your consent after you’ve defaulted on your loan.
Many believe that voluntary surrender is a less damaging option than a standard repossession. While it’s true that you avoid the embarrassment and potential confrontation of a surprise vehicle seizure, the impact on your credit report and financial standing isn’t dramatically different.
The Process of Voluntary Repossession
When you decide to voluntarily return your vehicle, you should contact your auto lender to inform them of your decision. Here’s a typical outline of how the process unfolds:
- Contact Your Lender: Reach out to your lender and explain your situation and your intention to voluntarily surrender the vehicle. They will provide instructions on where and how to return the car.
- Return the Vehicle: You’ll need to bring the car to a designated location, which could be the dealership, a repossession lot, or another place specified by the lender. Ensure you remove all personal belongings from the vehicle.
- Paperwork and Agreement: You’ll likely need to sign paperwork acknowledging the voluntary surrender. Read this document carefully to understand the terms and any potential fees involved.
- Vehicle Sale: The lender will then sell the vehicle, usually through an auction.
- Deficiency Balance (Likely): After the car is sold, the proceeds will be applied to your outstanding loan balance. It’s very common that the sale price doesn’t cover the entire loan amount. The remaining balance is known as a deficiency balance, which you will still be legally obligated to pay.
Could a Voluntary Repo Still Show as a Repossession?
Yes, despite the “voluntary” aspect, a voluntary repossession can still negatively impact your credit report and may be reported as a repossession. Credit bureaus don’t necessarily distinguish between voluntary and involuntary repossessions in a drastically different way. Both indicate to future lenders that you were unable to fulfill your loan obligations.
Here’s how a voluntary repossession can affect you:
- Credit Score Drop: Expect a significant drop in your credit score, similar to an involuntary repossession. The exact impact varies based on your credit history, but it will likely be substantial.
- Public Record: Repossessions, voluntary or not, can become part of your public record, further affecting your creditworthiness.
- Deficiency Balance and Further Debt: As mentioned, you’re usually responsible for the deficiency balance. If you don’t pay this, it can lead to collection actions, further damaging your credit and potentially resulting in wage garnishment or lawsuits.
- Difficulty Getting Future Loans: A repossession on your credit report, even a voluntary one, makes it harder and more expensive to get approved for loans in the future, including car loans, mortgages, or even credit cards. You’ll likely face higher interest rates due to being seen as a higher-risk borrower.
Is Voluntary Repossession Ever a Good Idea?
While it has downsides, voluntary repossession might be a slightly better option than involuntary repossession in certain situations:
- Avoiding Repossession Fees: You might avoid some of the fees associated with involuntary repossession, such as tow truck charges and storage fees, as you are delivering the vehicle yourself.
- More Control: Voluntary surrender allows you to plan the vehicle return and handle it on your own terms, rather than facing the uncertainty and potential stress of a surprise repossession.
- Potentially Less Negative Credit Impact (Slightly): Some argue that a voluntary repo might be viewed slightly less negatively than an involuntary one by future lenders, though the practical difference in credit score impact is often minimal. It shows you took some initiative to resolve the situation.
However, it’s crucial to understand that voluntary repossession is not a way to escape financial responsibility. You will likely still owe money on the car loan, and your credit will still suffer.
Alternatives to Voluntary Repossession
Before opting for voluntary repossession, explore all other possible alternatives:
- Contact Your Lender for Options: Reach out to your lender to discuss options like loan modification, refinancing, or a temporary payment plan. Lenders might be willing to work with you to avoid the repossession process altogether.
- Sell the Car Yourself: If you owe less than what the car is worth, selling the car privately could allow you to pay off the loan and avoid repossession.
- Debt Counseling: Seek advice from a credit counselor or financial advisor. They can help you assess your financial situation and explore all available options.
Conclusion
While the term “voluntary” might suggest a less damaging outcome, voluntarily surrendering your car to the dealership can still lead to a repossession being recorded on your credit history. It’s essential to weigh the pros and cons carefully and consider all alternatives before making this decision. Understanding the process and potential consequences will help you navigate challenging financial situations related to your car loan more effectively. Always prioritize communication with your lender and explore all possible solutions to avoid or mitigate the negative impacts of vehicle repossession.
