What Happens If I Surrender My Car to the Bank?
Considering voluntary car surrender? Understand the full financial and credit impact before taking action.
When unable to meet car loan obligations, individuals may consider voluntarily surrendering their vehicle to the lender. This process, also known as voluntary repossession, involves returning the financed car to the bank or financing company because regular payments are no longer feasible.
What Voluntary Surrender Means
Voluntary surrender occurs when a borrower willingly returns a financed vehicle to their lender due to an inability to continue making loan payments. This differs from an involuntary repossession, where the lender seizes the vehicle without the borrower’s direct cooperation. Choosing voluntary surrender allows the borrower a degree of control, potentially avoiding the distress and unexpected nature of an involuntary repossession.
Individuals often consider this option when facing significant financial hardship, such as job loss, unexpected medical expenses, or a substantial reduction in income. Initiating the surrender helps prevent further accumulation of debt, late fees, and a more aggressive collection process. While it indicates a failure to meet a loan obligation, it can be seen as a responsible action to mitigate escalating financial difficulties.
Steps to Surrender Your Vehicle
Contact your lender as soon as you realize you can no longer afford the payments. Explain your situation and intent to return the vehicle. Ask about their specific procedures and if money will still be owed after the sale.
The lender will typically provide instructions on where and when to return the vehicle. Before returning the car, ensure you remove all personal belongings, as you will not have access to it once surrendered. Keeping detailed records of your communications with the lender, including dates, times, and the names of individuals you speak with, is advisable. You will be asked to sign paperwork, such as a surrender agreement.
Understanding the Deficiency Balance
After a voluntary surrender, the lender will sell the vehicle, typically at an auction, to recover a portion of the outstanding loan balance. The sale price from the auction is often less than the vehicle’s market value, and frequently, it does not cover the entire amount owed on the loan. The difference between the outstanding loan balance and the amount the lender receives from the sale, plus any associated costs incurred by the lender, is known as the deficiency balance.
These associated costs can include expenses like towing, storage fees, reconditioning costs to prepare the vehicle for sale, and auction fees. For example, if you owed $10,000 on your car and the lender sells it for $7,000, you would be responsible for the $3,000 difference, plus any added fees.
Lenders may take actions to collect an unpaid deficiency balance. This can include sending dunning letters, making phone calls, or assigning the debt to a collection agency. If unsuccessful, the lender or collection agency may file a lawsuit to obtain a judgment. A judgment can lead to more aggressive collection methods, such as wage garnishment or bank account levies, depending on state laws.
Credit Reporting and Future Borrowing
Voluntary surrender negatively impacts an individual’s credit report. This is considered a loan default and appears as a derogatory mark, similar to an involuntary repossession. The voluntary surrender, missed payments, and deficiency balance are recorded on credit reports.
This negative information typically remains on a credit report for up to seven years from the date of the original delinquency. Voluntary surrender can significantly lower a credit score, potentially by 50 to 150 points or more. Such a reduction in credit score makes it more difficult to obtain new credit, including future car loans, mortgages, or other lines of credit.
Lenders view a negative credit history as an indicator of increased risk, leading to higher interest rates or outright denial of loan applications. Even if the deficiency balance is paid, the voluntary surrender event remains on the credit report for the full seven-year period. Rebuilding credit after a voluntary surrender requires diligent financial management, including timely payments on all other accounts and careful monitoring of credit reports.