How Bad Does It Hurt Your Credit to Let a Car Go Back?
Understand the extensive credit and financial repercussions of a vehicle repossession or voluntary surrender.
When facing financial challenges, individuals may consider options for managing an unaffordable car loan, including allowing the vehicle to be returned to the lender. This decision, while seemingly a solution to immediate payment burdens, carries significant and lasting implications for one’s credit standing. This article outlines how letting a car go back affects your credit, from the initial impact on your score to long-term reporting issues and future financial hurdles.
Understanding Vehicle Surrender and Repossession
Returning a vehicle to a lender can occur in two primary ways: voluntary surrender or involuntary repossession. Voluntary surrender happens when the borrower proactively returns the vehicle to the lender because they can no longer make payments, typically involving contacting the lender to arrange the return and completing necessary paperwork. Involuntary repossession occurs when the lender takes possession of the vehicle without the borrower’s direct cooperation, usually after a period of missed payments, as a response to a default on the loan agreement. Both voluntary surrender and involuntary repossession signify a failure to meet loan obligations, are reported to credit bureaus, and are viewed negatively, signaling a breach of the original loan contract.
Immediate Credit Score Impact
Allowing a car to go back to the lender, whether through voluntary surrender or involuntary repossession, immediately and significantly impacts an individual’s credit score. Credit scoring models, such as FICO and VantageScore, heavily weigh payment history as a primary factor, often accounting for approximately 35% of the score. Missed payments leading up to the vehicle’s return, or the event itself, are recorded as delinquencies. The “amounts owed” category (around 30% of a credit score) is also negatively affected; when a vehicle is returned, the loan will eventually be charged off by the lender as uncollectible, indicating the lender has written off the debt as a loss. The immediate drop in a credit score can be substantial, often ranging from 50 to over 100 points, depending on the individual’s credit profile and prior credit health.
Long-Term Credit Report Implications
The negative impact of a vehicle surrender or repossession extends for a considerable period on a credit report. Both events typically remain on an individual’s credit report for up to seven years from the date of the first missed payment that led to the event, meaning the negative mark will continue to influence credit decisions for years. A significant long-term consequence involves a “deficiency balance,” which occurs when the amount owed on the vehicle loan exceeds the price the lender receives from selling the repossessed or surrendered car, after deducting all associated costs such as towing, storage, and auction fees. For example, if a borrower owed $15,000 on a car that sells for $10,000 at auction, and the lender incurs $1,000 in fees, a $6,000 deficiency balance would remain. The lender can then pursue collection of this deficiency balance, which may involve selling the debt to a third-party collection agency or filing a lawsuit; a deficiency balance, whether paid or unpaid, can also be reported as a collections account or a further charge-off, creating additional negative entries on the credit report.
Future Financial Consequences
A damaged credit report stemming from a vehicle surrender or repossession creates numerous hurdles for future financial activities. Obtaining new credit becomes significantly more challenging, as lenders for auto loans, mortgages, or personal loans will view the past default as a high risk, often leading to outright denial of applications or the offer of much higher interest rates and less favorable terms. Beyond traditional lending, a poor credit history can affect other aspects of daily financial life. Many landlords review credit reports as part of their tenant screening process, making it difficult to secure rental housing without a cosigner or a larger security deposit. Some insurance providers use credit-based insurance scores to determine premiums, potentially resulting in higher costs for auto or home insurance, and opening new credit card accounts or establishing utility services may require substantial security deposits due to the perceived credit risk.