Does a Voluntary Repossession Hurt Your Credit?
Understand the financial repercussions of voluntarily returning your vehicle.
A voluntary repossession occurs when an individual returns a vehicle to the lender because they can no longer afford the payments. While voluntarily surrendering a vehicle might seem like a proactive step, it significantly harms one’s credit. This action represents a default on a loan obligation, which lenders report to credit bureaus.
How It Appears on Your Credit Report
A voluntary repossession will appear on a consumer’s credit report with specific negative entries. Lenders report this as a “voluntary repossession” or “voluntary surrender.” Any late payments leading up to the surrender will also be listed, damaging payment history.
These entries signal to credit bureaus and future creditors that the borrower failed to meet loan terms. The account status will reflect the repossession, showing a “charged-off” status or “settled for less than the full amount.” These designations impact future borrowing opportunities.
Long-Term Credit Score Impact
A voluntary repossession significantly lowers credit scores because it directly impacts key credit scoring factors, particularly payment history. A repossession demonstrates a failure to make agreed-upon payments. This negative mark can remain on a credit report for up to seven years from the date of the original delinquency that led to the repossession.
While the initial drop in credit score can be substantial, often ranging from 50 to 150 points, its impact may lessen over time as the repossession ages on the report. However, the derogatory mark remains visible for the entire seven-year period, influencing future credit decisions. The presence of such a mark indicates a higher risk to potential lenders.
Other Financial Ramifications
Beyond the direct credit score impact, a voluntary repossession carries additional financial consequences. The “deficiency balance” is the difference between the outstanding loan amount (plus certain fees) and the price the lender receives when selling the repossessed vehicle. For example, if a borrower owes $10,000 and the vehicle sells for $7,000, they would still owe the $3,000 deficiency balance, plus any associated costs like towing, storage, or auction fees.
Lenders can pursue collection efforts for this deficiency, which may include debt collection or lawsuits. If a lawsuit results in a judgment, it could lead to wage garnishment or bank account freezes. Furthermore, having a repossession on one’s record makes obtaining future credit, especially new auto loans, significantly more challenging and often results in higher interest rates or requires larger down payments.
Considering Your Options Before Repossession
Individuals struggling with car payments should explore all available options before considering a voluntary repossession. A proactive step involves immediately contacting the lender to discuss potential solutions. Lenders may offer options such as loan modification, which can involve adjusting payment amounts, lowering interest rates, or extending the loan term. Some may also offer payment deferment, allowing a temporary pause in payments.
Another alternative is attempting to sell the vehicle privately or to a dealership. If the sale price is close to or exceeds the outstanding loan balance, this can help avoid a repossession and a deficiency balance. Exploring these actions before a repossession occurs can potentially mitigate some of the most severe financial and credit impacts.