Can You Turn In Your Car If You Can’t Afford It?

Facing unaffordable car payments can be challenging. This article explores strategies and financial implications for managing an unmanageable auto loan.

Voluntary Car Surrender

Voluntary car surrender, also known as voluntary repossession, occurs when a borrower proactively returns their vehicle to the lender because they are no longer able to meet the agreed-upon loan payments. This action is initiated by the borrower and differs from an involuntary repossession, where the lender seizes the vehicle without the borrower’s direct cooperation.

To initiate a voluntary surrender, contact your lender as soon as you realize you cannot continue making payments. The lender will provide instructions on how to return the vehicle, which may involve dropping it off at a specified location or arranging for a pickup. Before returning the car, ensure all personal belongings are removed, and keep detailed records of the interaction, including dates, times, and names of individuals involved. The vehicle should generally be returned in good condition.

After the car is surrendered, the lender will sell it to recover some of the outstanding loan amount. The proceeds from this sale are applied to your loan balance. However, the sale price often does not cover the entire remaining debt due to depreciation and lender costs like repossession, storage, and auction fees.

The difference between the total amount owed (loan balance plus fees) and the sale price is known as a “deficiency balance”. As the borrower, you remain responsible for paying this deficiency balance to the lender. For example, if you owe $12,000 and the car sells for $7,000, you could still owe $5,000 plus any associated fees.

Exploring Other Options

Before considering voluntary surrender, explore alternative strategies to manage or resolve an unmanageable car loan. These options may offer more favorable outcomes.

One option is to sell the car yourself, either through a private sale or by trading it in at a dealership. If you sell the vehicle, you must obtain a payoff quote from your lender. The lender holds the vehicle’s title until the loan is paid in full, so their involvement is necessary to transfer ownership to a new buyer. If the sale price is less than the payoff amount, known as having negative equity, you will need to pay the difference to the lender to complete the transaction.

Refinancing the loan is another avenue to explore, which involves taking out a new loan to replace your current one with more favorable terms. This could mean a lower interest rate, a longer repayment period, or both, resulting in reduced monthly payments. Eligibility for refinancing depends on factors such as your credit score, the vehicle’s age and mileage, and your current loan’s status. Lenders also assess your debt-to-income ratio to ensure you have sufficient income to cover monthly debt obligations. Applications generally require proof of income, residency, insurance, and details about your vehicle and current loan.

Negotiating directly with your current lender can also provide relief, especially if your financial hardship is temporary. Many lenders offer hardship programs that can include options like payment deferral, where payments are paused for a short period and typically added to the end of the loan term. Loan modification is another possibility, which might involve extending the loan term to lower monthly payments or reducing the interest rate. Communicate with your lender promptly, ideally before missing any payments, to discuss available arrangements and explore solutions that fit your changed financial circumstances.

Understanding the Financial Aftermath

Unpaid car loans, whether through voluntary surrender or other means, lead to significant financial consequences. Understanding this aftermath is important for informed decisions.

Involuntary repossession occurs when the lender seizes the vehicle without the borrower’s active participation, typically after loan default. Unlike voluntary surrender, this can happen without prior notice in many states, and the vehicle can be taken from a driveway or public area. While the outcome, a deficiency balance, is similar to voluntary surrender, involuntary repossession may incur additional fees like towing and storage.

Both voluntary surrender with a deficiency and involuntary repossession negatively affect your credit score. A repossession is reported to credit bureaus and can remain on your credit report for up to seven years from the date of the first missed payment. This derogatory mark can substantially lower your credit score, making it more challenging to obtain future loans or credit at favorable terms.

If a deficiency balance remains unpaid after the vehicle is sold, the lender may pursue various collection efforts. This can involve the debt being sold to a third-party collection agency. If these efforts are unsuccessful, the lender or collection agency may initiate legal action by filing a lawsuit to recover the outstanding balance.

Should a court judgment be obtained against you for the deficiency balance, the lender gains legal rights to enforce collection. This could include wage garnishment, bank account levies, or placing liens on other property you own. These actions can further compound financial difficulties and prolong the impact on your financial health and access to credit for years to come.