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Although a reliable car may be extremely helpful to have in your driveway, the loan you’re using to finance it can be a hefty financial commitment, especially when you factor in the interest and related fees. Depending on what you can afford, your loan payments will likely be stretched out over many years, which can lead to a massive amount of unpaid debt, damaged credit, and a dangerous lack of savings.
In fact, if your debt becomes too large to pay off and you’re unable to keep up with payments, your bank may even repossess your car so they can recuperate their losses. While this can be a huge inconvenience, the process may go easier if you hand over the keys voluntarily. Keep reading to learn the benefits and drawbacks of voluntary auto repossession.
If you’re thinking about financing any type of vehicle, consider the fact that you don’t technically own its title until you’ve completed your repayment plan. Until then, your bank, dealership, or other lender has the legal right to repossess and resell the vehicle if you default on too many of your loan payments. As its name suggests, voluntary repossession is when you bring the car back without them having to collect it from you.
There are two types of car repossessions: voluntary and involuntary repossession. They both have similar processes, but the biggest difference is how much effort you’re willing to put in.
If you don’t return the car on your own, your lender will need to have it towed from your dwelling or place of employment. This can not only be embarrassing but result in unwanted towing charges as well. So, to avoid that kind of liability, it may be safer to just drive the car right to them and fork over the keys without a fight.
All you have to do is inform them of your inability to pay your loan balance, then arrange a time and destination to drop off the vehicle. Some lenders may even arrange for someone else to come repossess the car.
Once the car has been repossessed whether involuntarily or voluntarily, the lender will resell the car to recoup the payment. They will then send you a document called the “statement of realization” which will detail how much the car was sold for and whether you still owe any money.
Sometimes, when a lender resells a car, it isn’t enough to cover what you still owe on the loan. This typically happens due to the high depreciation rate of cars. The difference owed, also known as a shortfall or deficiency, must be paid back, along with any fees, penalties and repossession costs. Repossession costs may be avoided if you voluntarily surrender the car.
Before we discuss those drawbacks, let’s talk about some of the more positive aspects of handing over your vehicle voluntarily:
Now that you’re aware of the main benefits of voluntarily returning your vehicle, it’s time to discuss some of the major drawbacks, such as:
If you still owe money and can’t afford to pay it, you could also ask your lender for a payment plan for the remaining debt owed. If you can’t afford any payments, you can file for a consumer proposal or bankruptcy. The debt owed would be discharged under both programs, however, it’s important to surrender the car prior to filing.
As mentioned, since you may have defaulted on your loan, your credit could be negatively affected, whether you voluntarily or involuntarily surrender your vehicle. 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:
These kinds of events can lead to a significant drop in your credit scores, which normally ranges from 300-900. The closer your score gets to the 300 mark, the riskier you’ll be considered when you apply for new credit in the near future.
If your lenders deem you less creditworthy, your borrowing options will be far more limited and expensive, due to higher interest rates. This is particularly true for lenders that offer vehicle financing and other asset-based credit products, where there is more liability involved when clients default.
Suffice to say, 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:
Before you fall behind on your vehicle payments or accumulate too much debt trying to manage your payments, consider seeking the help of a professional. It’s always in your best interest to ask for help. Speak with your lender or get in contact with Loans Canada for more information about your options.
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Loans Canada is pleased to announce it placed No. 131 on the 2022 Report on Business ranking of Canada’s Top Growing Companies.
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