If you’re struggling to make your car payments, you risk 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 are 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.
How Many Car Payments Can You Miss Before Repossession?
Generally speaking, your lender can start the process of repossession after 2 or 3 missed payments. That said, the exact number depends on the lender.
Make sure you understand your lender’s repossession policies before taking out a car loan.
| Number Of Missed Payments | Penalty |
| 1 | -Late fees -Additional interest |
| 2 to 3 | -Additional late fees -Credit score drop -Risk of repossession |
| 4 | -Repossession -Credit score damage |
Learn more: How Many Car Payments Can You Miss Before A Repossession?
How Does A Voluntary Car Repossession Work?
Vehicle repossession usually occurs when you default on your car loan. Here’s how the process works:
Step 1: Consult With Your Lender
Let your lender know that you’re having trouble making payments and want to return the vehicle to avoid further penalties. Then, arrange a time and place to have the vehicle dropped off.
Step 2: Drop Off The Vehicle
Take all personal items out of the vehicle and drop the car off at the agreed-upon location and time. Make sure you note when and where the car was dropped off and who you gave the keys to in case you need to provide this information to your lender at some point.
Step 3: The Lender Will Sell The Vehicle
Once your lender has possession of your vehicle, they’ll try to sell it and use the proceeds to recover the outstanding loan amount.
| Note: 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. For example, if your outstanding loan balance on the car loan is $10,000 and the lender can only get $7,000 for it, you’ll owe the difference of $3,000. |
What Can You Do If You Still Owe Money After A Voluntary Car 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.
- Consider Debt Consolidation – If the remaining balance is significant, consolidating your debt into a lower-interest loan might help.
- 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.
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 and store it, 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 score will take a hit 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.
How Will A Voluntary Repossession Affect Your Credit?
Whether you voluntarily or involuntarily surrender your vehicle, your credit could be negatively affected in a few ways:
- Poor Payment History – Loan payments that were late, short, or missed entirely will appear on your credit report for several years. This can negatively impact your credit scores.
- Lower Credit Rating – In addition, the account associated with your vehicle loan repossession will receive a credit rating of R8, which is the same rating you get when you file for bankruptcy.
- Public Record – If you still owe money after the lender sells your vehicle, they can take you to court or pass your debt over to a collection agency. This may be noted on your credit report as a public record and significantly hurt your credit score.
These kinds of events can lead to a significant drop in your credit scores. If future lenders deem you less creditworthy, your borrowing options will be far more limited and expensive, due to higher interest rates.
Can You Get Your Car Back After Repossession?
Yes, it’s possible to get your vehicle back after it’s been repossessed. If you want to get your car back, you have a couple of options:
- Pay Off What You Owe: The best way to get your car back after the lender repossesses it is to pay off your remaining balance, if possible.
- Negotiate A Plan With The Lender: If you can’t afford to cover the outstanding balance, you can try to work something out with the lender to come up with a more affordable plan for you. Not all lenders may be open to this idea, but it’s worth a try.
Learn more: Can You Get Your Car Back 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, if possible, it may be in your best interest to avoid the process.
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, an extension on your term, or a hardship program before you fall behind on your payments.
Refinance Your Loan
Refinancing a car loan means replacing your current loan with a new one, ideally with a lower rate and more favourable loan terms. By refinancing, you can reduce your monthly payments by extending the loan term, or save money in interest over the long haul by securing a lower rate.
If your credit is still in good shape, you may be able to refinance the vehicle and acquire a new, more affordable loan contract.
| Note: This may only be a viable option if there are no early prepayment penalties involved. Be sure to crunch the numbers to see if the savings from a refinance outweigh these potential costs. |
Speak with a Loans Canada representative today and learn how you can refinance your car loan and save. Call us today at 1-877-995-6269 or click here.
Note: Program is currently not offered in Quebec.
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 your credit involved.
