If you’re struggling to make your car payments, you run the risk of defaulting on your car loan. If that happens, your lender could potentially repossess your car. Rather than having your vehicle seized involuntarily, you may choose to voluntarily surrender your car. Though a difficult decision to make, it may be necessary if you have few other options.
Let’s go into more detail about the process of voluntary repossession, its implications, and what you should consider before making a final decision.
Key Points
- Voluntary repossession involves willingly handing in your car to your lender if you believe you’re at risk of defaulting on your car loan.
- You may consider voluntary repossession to avoid the costs of having your car seized, as well as to minimize the negative effect on your reputation with your lender.
- Keep in mind that even if you voluntarily surrender your car, your credit score will still be negatively affected.
What Is Voluntary Repossession?
Voluntary repossession happens when you willingly return your vehicle to the lender because you can no longer cover your car payments. This differs from involuntary repossession, where the lender seizes your car against your will after you’ve defaulted on your loan.
Voluntary repossession may sometimes be less harmful to your credit score and overall financial health compared to forced repossession, though it still has significant repercussions.
Learn more: How Many Car Payments Can You Miss Before A Repossession?
How Does Car Repossession Work?
Vehicle repossession usually occurs when you default on your car loan. Here’s how the process works:
- Notice Sent: After you’ve missed a few car loan payments, your lender will likely get in touch with you to let you know about the overdue amount and the deadline to catch up on missed payments.
- Vehicle Repossession: If you don’t make your payments by the specified deadline, your lender may send someone to repossess your vehicle. However, before they send someone, you can take the voluntary repossession route and let your lender know you’re willing to return the car. That way, repossession costs and hassles may be avoided if you voluntarily surrender the car.
- Vehicle Sale: Once your lender has possession of your vehicle, they’ll try to sell it and use the proceeds to recover the outstanding loan amount.
- Legal Action: Depending on your situation, your lender could take you to court if the proceeds of the sale are not enough to cover the remaining loan balance.
Learn more: Can You Get Your Car Back After Repossession?
What Are The Benefits Of Voluntarily Surrendering Your Car?
There are some positive aspects of handing over your vehicle voluntarily:
- Avoid Fees – You can avoid some of the extra fees the lender would charge you if they had to hire a repo-company to tow the vehicle from your driveway, which could happen at any point, totally unannounced.
- Keep A Good Relationship With Lender – Since you’ll be returning your car willingly, your lender may be more inclined to keep you on as a future client, as long as you pay back whatever loan-related costs remain.
- No Collection Agency Involvement – Although your credit will be damaged whether you give the car back willingly or not, that damage may be less severe if you miss fewer payments and the lender doesn’t have to turn your file over to a collection agency.
What Are The Drawbacks Of Voluntarily Surrendering Your Car?
While voluntary repossession may come with some perks, there are some drawbacks to consider:
- Penalty Fees – While you may be able to avoid some of the costs associated with involuntary repossession, you’ll still be liable for any unpaid loan amounts, late fees, and penalties for missed loan payments.
- Difference In Car Value Vs Loan Balance – If the lender sells the car for less than the remaining loan balance, you’ll still have to pay the difference.
- Negative Effect On Credit – Your credit score will take a hit, even if you voluntarily hand over your car to your lender.
What Can You Do If You Still Owe Money After A Repossession?
If you still owe money and can’t afford to pay it, you could consider one of the following options:
- Negotiate With Your Lender: Reach out to your lender to discuss a potential repayment plan to cover the remaining balance on your car loan. If you’ve otherwise been a responsible borrower, your lender may be willing to work with you to come up with a more manageable payment arrangement.
- Adjust Your Budget: Look over your budget and see changes can be made that will free up more money to cover your car loan payments. To make things easier, consider using a budgeting app.
- Credit Counselling: Call a credit counselling agency to help you create a plan to better manage your finances and debts, and perhaps negotiate with creditors on your behalf.
How Will A Voluntary Repossession Affect Your Credit?
Whether you voluntarily or involuntarily surrender your vehicle, your credit could be negatively affected. Although the exact amount of damage depends on how many payments you’ve missed, and which credit bureau you check with (Equifax or TransUnion), here’s what can happen to your credit:
- Poor Payment History – Every loan payment that was late, short, or missed entirely will appear on your credit report for several years. This can negatively impact your credit scores. When potential lenders inspect your report, they can see these negative marks and may judge your creditworthiness differently.
- Lower Credit Rating – In addition, the account associated with your vehicle loan will receive a credit rating of R8 when the vehicle is repossessed. The longer you go without paying, the more debt collection penalties you’ll be subjected to and the worse your rating becomes.
These kinds of events can lead to a significant drop in your credit scores. If future lenders deem you less creditworthy, your car loan options will be far more limited and expensive, due to higher interest rates.
Learn more: How To Get A Car Loan After Repossession
How Can You Avoid A Voluntary Repossession?
While voluntarily surrendering your car can save you a lot of trouble down the line, it can still lead to some harsh negative consequences for your credit and financial health as a whole. So, it may be in your best interest to avoid the process however possible.
Here’s how you can potentially bypass a repossession entirely:
- Speak To Your Lender – Discuss the situation with your lender before you default on your loan. They may be able to offer you adjusted payments, a payment deferral, or an extension on your term.
- Refinance Your Loan – If your credit is still in good shape, you may be able to refinance the vehicle and acquire a new, more affordable loan contract.
- Budget – If the problem is your spending habits, try creating a proper budget, reducing your monthly expenses, or earning more income with a second job or side hustle.
- Sell Or Trade-In Your Car – If there’s sufficient equity in the car, you may be able to trade it in for a cheaper model or sell it so you can use the profit to pay the outstanding loan balance. If you don’t break even or make a profit from the sale, you may still cover the remaining difference using your own funds so you can transfer the title to a new owner.
Final Thoughts
Voluntarily surrendering your car may have some perks, but there are also some serious drawbacks as well. As such, be sure to carefully consider whether this option is the right one for you. If you decide that a voluntary surrender is the best choice, remember that there are still penalty fees and negative effects on credit involved.
