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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. 

What Is Voluntary 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.

Types Of Car Repossessions

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.

Involuntary Repossession

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.

Voluntary Surrender

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. 

How Do Car Repossessions Work? 

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.  

How to finance a car in Canada

What Are The Benefits Of Voluntarily Surrendering Your Car?

Before we discuss those drawbacks, let’s talk about some of the more 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 – 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?

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: 

  • Penalty Fees – Voluntary repossession doesn’t mean your unpaid loan is forgotten. Not only will you be charged penalty fees for any payments you’ve defaulted on, but you will also be responsible for paying the difference between the remaining loan balance and the amount the lender resells it for, if at all.
  • Car Resale Value – Since most vehicles depreciate rapidly in value the more they’re driven, it’s likely the lender won’t be able to make a profit or break even upon resale. If you don’t cover the difference within a reasonable timeframe, they could turn the situation over to a collection agency, further increasing your debt problems.
  • Wage Garnishment – If your unpaid debt is bad enough, the lender may even try to sue you over the remaining balance, which can lead to wage garnishment and other legal consequences, such as bankruptcy, in the worst of cases.

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 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.  

How Will A Voluntary Repossession Affect Your Credit?

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: 

  • 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, 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. 

How Can You Avoid A Voluntary Repossession?

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:

  • Speak To Your Lender – Discuss the situation with your lender before you start defaulting on your loan. They may be able to offer you adjusted payments, a payment deferral or an extension on your term.
  • Refinance Vehicle – If those options aren’t possible and 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 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 for the sale, cover the remaining difference using your own funds so you can transfer the title to a new owner.

Voluntary Repossession FAQs

How long does a voluntary car repossession stay on a credit report?

Generally, when you default on a loan or if your account is closed due to repossession (voluntarily or not), it will stay on your credit report for 7 years.

Will I be free from my car loan if I voluntarily surrender the car?

The answer depends on how much your car resells for. If the lender is unable to recoup the entire loan amount after selling your car, then you’ll be held liable for the difference. Moreover, you’ll be responsible for any late payment and prepayment penalties. If you’re unable to pay back any of these costs, your account may be sold to a collection agency.

How do I get out of a car loan in Canada?

There are multiple ways to get out of a car loan in Canada. This includes selling your car, trading in your car, and voluntarily surrendering your car. If you’re looking for more affordable payments, you can also try refinancing your car loan.

Consider Asking For Help

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.

Bryan Daly avatar on Loans Canada
Bryan Daly

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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