Auto loans can be tricky. Imagine you sign up for a hefty loan when you desperately want to finance your purchase. And later, you find yourself struggling to afford the monthly payments. Then you realize that your financial condition will go beyond saving if you move forward with the payments. In this scenario, the safest option to save your financial situation and credit history would be choosing voluntary repossession of your car. Read to know more.
What is voluntary repossession?
When you give your car back to the lender because you can no longer meet the terms of your loan agreement, you opt for a voluntary repossession. The vehicle is already collateral to the loan, and the lender can repossess it if you don’t repay the loan. This can affect your credit. Voluntary repossession is an immediate alternative to repossession as it hardly affects your credit report.
Until the full loan payment, the lender retains legal title to the vehicle. Loan repayment is contingent upon maintaining ownership of the vehicle, which serves as collateral for the loan. When a borrower voluntarily contacts their lender about being unable to keep up with car payments, it is called a voluntary surrender. Even though you’ll still be out of the car, at least you won’t have to deal with the hassle and possible shame of repossession if you give it up voluntarily.
Is a voluntary surrender or repossession the better option?
Giving up your car on your own and having it taken away is both emotionally and financially daunting. But giving up your car on your own shows that you are ready to communicate with your lender and take care of your finances effectively. This helps in avoiding any friction with the lender. You also don’t have to deal with having a towing company that might come take your car. And can safely bypass any extra fees as well.
Voluntary repossession’s impacts on your finances
You might still owe the lender some money
The lender may try to sell the car to get as much money as possible to pay off the rest of the loan. After the sale, you’ll have to pay any remaining balance and any fees, like late payment or prepayment fees. If you can’t pay, your account could be given to a debt collector, which would show up on your credit report. The lender could also take you to court, which could mean giving the lender some of your income to pay off the rest of what you owe.
It negatively affects your credit
Your credit takes a big hit if you don’t pay back a loan. After a repossession, you can even rebuild your credit by taking out new loans and paying them off over time. But it does not mean that this transaction will be off records.
A voluntary repossession is the same as a forced one: a loan that was not paid back. Both will hurt your credit score. But there is a slight difference: When you give up a loan on your own, it looks different on your credit report, which could be important to someone who looks at your report by hand. A voluntary repossession and any collections or court judgments that come after it can potentially stay on your credit report as a negative mark for up to seven years.
Experian says that your credit report will say “voluntary surrender” instead of “repossession.” This may hurt your credit a little less. But, on the other hand, your credit score may go down, making it harder for you to get a loan in the future. In addition, if you get the loan, the interest rate will likely be higher because you are more likely to not pay it back.
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How to avoid voluntary repossession
Communicate with your lender
There could be options besides voluntary repossession if you’re having trouble making automobile payments. Try communicating with the bank about this. If you want to keep your automobile but having trouble making the payments, investigate your eligibility for a repayment plan or additional time to pay. This is only helpful when you are not too far behind on payments.
Consider refinancing
Move your vehicle loan payments to a new lender. By shifting the loan to a family member, like a parent, you can make them financially responsible for the automobile in your absence. By doing so, you may gradually keep the automobile while repaying your parents (or whoever is lending it to you). Before trying this, check with your lender to be sure it’s acceptable.
You should consider getting an automobile to refinance. Good credit might help you refinance your auto loan at a cheaper interest rate, making your monthly payments more manageable. Another option is to sell your vehicle. You might be able to sell your automobile and obtain enough to pay off your debt in full. You may even have enough left to buy a cheaper vehicle.
FAQs on voluntary repossession
Does voluntary repossession lower your credit score?
It’s impossible to say with certainty how low your credit score can go following a repossession, but it will be much lower. Several things go into determining your credit score. Your credit will take a hit for the repossession itself and any past-due payments, collections, or judgments that have been filed against you. Considering that your payment history accounts for the bulk of your credit score, you should prepare for a sizable impact.
How to handle voluntary repossession of a car?
When you cannot make payments, it’s better to return your vehicle to your lender in a voluntary repossession. First, you should notify your lender that you will no longer be making payments and that you wish to surrender the vehicle. Then you set a time and place to bring the vehicle and hand over the keys.
What are the negative effects of voluntary repossession?
Giving up a loan on your own is the same as not paying it back. Even though you’re being responsible, this will show up in your credit history and lower your score. A bad thing on your credit report can stay there for up to seven years.
How to remove a voluntary repossession from your credit report?
If repossession is valid, the only way to get it off your credit report other than waiting seven years is to negotiate with your lender. If you pay off the debt at once, your lender might agree to take the item off your credit report. Make sure to get everything in writing if the lender agrees to this plan.
How long does a voluntary repossession stay on your credit?
A voluntary repossession can stay on your credit report for seven years.
Bottomline
The option of voluntary repossession should be considered last. But first, you should contact your lender. They have probably assisted other debtors in a similar predicament to yours. If you and your lender cannot agree and you have tried everything else, you may want to consider a voluntary repossession.
While this option may help you avoid the stress of a repo man showing up at your door, it is important to remember that it will likely negatively impact your credit. Consequently, you shouldn’t make a choice carelessly. If you still need a car, you may lower your monthly payments by purchasing a less costly make and model or a pre-owned vehicle. If you pay off your monthly payments, you won’t have to worry about missing any.
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